UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
|
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o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________________ to ___________________
COMMISSION FILE NUMBER 001-31579
DORAL FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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|
Puerto Rico
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66-0312162 |
(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification number) |
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1451 F.D. Roosevelt Avenue,
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San Juan, Puerto Rico
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00920-2717 |
(Address of principal executive offices) |
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(Zip Code) |
(787) 474-6700
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
Yes
o No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company (as defined in rule 12b-2 of the Exchange
Act).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock: 127,293,756 outstanding as of August 12, 2011.
DORAL FINANCIAL CORPORATION
INDEX PAGE
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010
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June 30, |
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December 31, |
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(Dollars in thousands, except for share data) |
|
2011 |
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|
2010 |
|
Assets |
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Cash and due from banks ($890 and $2,642 were restricted at June 30, 2011 and December 31, 2010, respectively) |
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$ |
562,397 |
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$ |
355,819 |
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|
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Other interest-earning assets ($18,967 and $126,573 were restricted at June 30, 2011 and December 31, 2010, respectively) |
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43,967 |
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156,607 |
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Securities held for trading, at fair value |
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44,589 |
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45,029 |
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Securities available for sale, at fair value (includes $631,257 and $743,843 pledged as collateral at June 30, 2011 and December
31, 2010, respectively, that may be repledged) |
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671,451 |
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1,505,065 |
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Federal Home Loan Bank of NY (FHLB) stock, at cost |
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74,565 |
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78,087 |
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Total investment securities |
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790,605 |
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1,628,181 |
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Loans: |
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Loans held for sale, at lower of cost or market (includes $119,729 and $121,988 pledged as collateral at
June 30, 2011 and December 31, 2010, respectively, that may be repledged) |
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301,934 |
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319,269 |
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Loans receivable (includes $174,333 and $180,447 pledged as collateral at June 30, 2011 and December 31,
2010, respectively, that may be repledged) |
|
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5,688,598 |
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5,588,571 |
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Less: Allowance for loan and lease losses |
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(93,472 |
) |
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(123,652 |
) |
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Total net loans receivable |
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5,595,126 |
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|
5,464,919 |
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Total loans, net |
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5,897,060 |
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5,784,188 |
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Accounts receivable |
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41,592 |
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28,704 |
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Mortgage-servicing advances |
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|
54,011 |
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51,462 |
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Accrued interest receivable |
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37,244 |
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38,774 |
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Servicing assets, net |
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115,785 |
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114,342 |
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Premises and equipment, net |
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103,386 |
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104,053 |
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Real estate held for sale, net |
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101,499 |
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100,273 |
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Deferred tax asset (DTA) |
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103,958 |
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105,712 |
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Other assets |
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164,192 |
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178,239 |
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Total assets |
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$ |
8,015,696 |
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$ |
8,646,354 |
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Liabilities |
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Deposits: |
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Non-interest-bearing deposits |
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$ |
285,582 |
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$ |
258,230 |
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Other interest-bearing deposits |
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1,986,102 |
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2,000,991 |
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Brokered certificate of deposits |
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2,031,108 |
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2,359,254 |
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Total deposits |
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4,302,792 |
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4,618,475 |
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Securities sold under agreements to repurchase |
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442,300 |
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1,176,800 |
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Advances from FHLB |
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1,342,849 |
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901,420 |
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Loans payable |
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|
294,623 |
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304,035 |
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Notes payable |
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|
510,430 |
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513,958 |
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Accrued expenses and other liabilities |
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258,442 |
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269,471 |
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Total liabilities |
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7,151,436 |
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7,784,159 |
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Commitments
and contingencies (Please refer to Notes 24 and 25) |
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Stockholders Equity |
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Preferred stock, $1 par value; 40,000,000 shares authorized; 5,811,391 shares issued and outstanding, at aggregate liquidation
preference value at June 30, 2011 and December 31, 2010, respectively. |
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Perpetual noncumulative nonconvertible preferred stock (Series A, B and C) |
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148,700 |
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148,700 |
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Perpetual cumulative convertible preferred stock |
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203,382 |
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203,382 |
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Common stock, $0.01 par value; 300,000,000 shares authorized; 127,293,756 shares issued and outstanding at both June 30, 2011
and December 31, 2010 |
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1,273 |
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|
1,273 |
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Additional paid-in capital |
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1,220,983 |
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1,219,280 |
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Legal surplus |
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|
23,596 |
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23,596 |
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Accumulated deficit |
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|
(735,229 |
) |
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|
(738,199 |
) |
Accumulated other comprehensive income (loss), net of income tax expense of $621 and expense of $1,332 at June 30, 2011 and
December 31, 2010, respectively |
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1,555 |
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4,163 |
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Total stockholders equity |
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|
864,260 |
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|
862,195 |
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Total liabilities and stockholders equity |
|
$ |
8,015,696 |
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$ |
8,646,354 |
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The accompanying notes are an integral part of these financial statements.
1
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Quarters Ended |
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Six Month Periods Ended |
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June 30, |
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June 30, |
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(In thousands, except for share data) |
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2011 |
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2010 |
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2011 |
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2010 |
|
Interest income: |
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Loans |
|
$ |
79,238 |
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$ |
78,916 |
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|
$ |
159,303 |
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|
$ |
160,349 |
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Mortgage-backed securities (MBS) |
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|
9,221 |
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18,542 |
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|
20,277 |
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|
41,789 |
|
Interest-only strips (IOs) |
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|
1,508 |
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|
|
1,491 |
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2,979 |
|
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|
3,034 |
|
Investment securities |
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|
130 |
|
|
|
583 |
|
|
|
229 |
|
|
|
1,448 |
|
Other interest-earning assets |
|
|
1,020 |
|
|
|
1,545 |
|
|
|
2,320 |
|
|
|
3,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
91,117 |
|
|
|
101,077 |
|
|
|
185,108 |
|
|
|
210,305 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Deposits |
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|
22,543 |
|
|
|
27,587 |
|
|
|
49,442 |
|
|
|
54,287 |
|
Securities sold under agreements to repurchase |
|
|
6,238 |
|
|
|
13,738 |
|
|
|
15,357 |
|
|
|
31,762 |
|
Advances from FHLB |
|
|
8,822 |
|
|
|
12,921 |
|
|
|
15,430 |
|
|
|
26,894 |
|
Notes payable |
|
|
6,561 |
|
|
|
5,086 |
|
|
|
13,214 |
|
|
|
10,196 |
|
Loans payable |
|
|
1,498 |
|
|
|
1,680 |
|
|
|
3,040 |
|
|
|
3,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
45,662 |
|
|
|
61,012 |
|
|
|
96,483 |
|
|
|
126,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
45,455 |
|
|
|
40,065 |
|
|
|
88,625 |
|
|
|
83,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
13,323 |
|
|
|
44,617 |
|
|
|
15,914 |
|
|
|
58,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses |
|
|
32,132 |
|
|
|
(4,552 |
) |
|
|
72,711 |
|
|
|
25,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment (OTTI) losses |
|
|
(411 |
) |
|
|
|
|
|
|
(411 |
) |
|
|
(40,195 |
) |
Portion of loss recognized in other comprehensive income (before taxes) |
|
|
325 |
|
|
|
|
|
|
|
325 |
|
|
|
26,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit related OTTI losses |
|
|
(86 |
) |
|
|
|
|
|
|
(86 |
) |
|
|
(13,259 |
) |
Net gain (loss) on sale of investment securities available for sale |
|
|
14,808 |
|
|
|
(137,204 |
) |
|
|
17,662 |
|
|
|
(110,790 |
) |
Net loss on early repayment of debt |
|
|
(3,068 |
) |
|
|
(2,545 |
) |
|
|
(3,068 |
) |
|
|
(3,021 |
) |
Net gain on loans securitized and sold and capitalization of mortgage servicing |
|
|
9,026 |
|
|
|
3,605 |
|
|
|
14,568 |
|
|
|
6,956 |
|
Retail banking fees |
|
|
7,067 |
|
|
|
7,199 |
|
|
|
14,073 |
|
|
|
14,342 |
|
Mortgage loan servicing income (net of mark-to-market adjustments) |
|
|
4,543 |
|
|
|
(1,354 |
) |
|
|
13,442 |
|
|
|
5,390 |
|
Net gain on trading assets and derivatives |
|
|
3,373 |
|
|
|
7,102 |
|
|
|
2,286 |
|
|
|
8,091 |
|
Insurance agency commissions |
|
|
2,439 |
|
|
|
2,436 |
|
|
|
4,661 |
|
|
|
4,778 |
|
Other income |
|
|
695 |
|
|
|
571 |
|
|
|
3,884 |
|
|
|
3,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss) |
|
|
38,797 |
|
|
|
(120,190 |
) |
|
|
67,422 |
|
|
|
(83,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
21,081 |
|
|
|
20,315 |
|
|
|
39,375 |
|
|
|
36,750 |
|
Professional services |
|
|
9,339 |
|
|
|
15,420 |
|
|
|
17,976 |
|
|
|
29,212 |
|
Occupancy expenses |
|
|
4,786 |
|
|
|
4,322 |
|
|
|
9,126 |
|
|
|
8,303 |
|
FDIC insurance expense |
|
|
3,797 |
|
|
|
5,574 |
|
|
|
8,153 |
|
|
|
10,765 |
|
Communication expenses |
|
|
3,636 |
|
|
|
4,056 |
|
|
|
7,639 |
|
|
|
8,000 |
|
Depreciation and amortization |
|
|
3,463 |
|
|
|
3,110 |
|
|
|
6,666 |
|
|
|
6,257 |
|
EDP expenses |
|
|
3,024 |
|
|
|
2,878 |
|
|
|
6,299 |
|
|
|
6,657 |
|
Taxes, other than payroll and income taxes |
|
|
2,923 |
|
|
|
2,591 |
|
|
|
5,799 |
|
|
|
5,155 |
|
Corporate Insurance |
|
|
1,490 |
|
|
|
1,264 |
|
|
|
3,060 |
|
|
|
2,526 |
|
Other |
|
|
5,785 |
|
|
|
9,737 |
|
|
|
11,688 |
|
|
|
16,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,324 |
|
|
|
69,267 |
|
|
|
115,781 |
|
|
|
129,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other provisions and other real estate owned expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure expenses and other credit related expenses |
|
|
2,196 |
|
|
|
582 |
|
|
|
4,561 |
|
|
|
2,723 |
|
Other real estate owned (OREO) expenses |
|
|
2,061 |
|
|
|
23,414 |
|
|
|
4,023 |
|
|
|
28,011 |
|
Provision for Lehman Brothers, Inc. claim receivable |
|
|
|
|
|
|
10,819 |
|
|
|
|
|
|
|
10,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,257 |
|
|
|
34,815 |
|
|
|
8,584 |
|
|
|
41,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
63,581 |
|
|
|
104,082 |
|
|
|
124,365 |
|
|
|
171,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
7,348 |
|
|
|
(228,824 |
) |
|
|
15,768 |
|
|
|
(229,798 |
) |
Income tax expense |
|
|
2,871 |
|
|
|
4,487 |
|
|
|
7,968 |
|
|
|
7,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,477 |
|
|
$ |
(233,311 |
) |
|
$ |
7,800 |
|
|
$ |
(236,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders(1) |
|
$ |
2,062 |
|
|
$ |
(235,726 |
) |
|
$ |
2,970 |
|
|
$ |
(214,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share(1)(2) |
|
$ |
0.02 |
|
|
$ |
(3.50 |
) |
|
$ |
0.02 |
|
|
$ |
(3.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the quarters and six month periods ended June 30, 2011 and 2010, net income
(loss) per common share represents the basic and diluted loss per common share. Refer to Note
28 for additional information regarding net income (loss) attributable to common shareholders. |
|
(2) |
|
For the six month period ended June 30, 2010, net loss per common share included
$26.6 million related to the effect of the preferred stock exchange. Refer to Note 28 for
additional information. |
The accompanying notes are an integral part of these financial statements.
2
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Preferred Stock: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
352,082 |
|
|
$ |
415,428 |
|
Preferred stock issued (mandatorily convertible) |
|
|
|
|
|
|
171,000 |
|
Conversion of preferred stock to common stock at par value: |
|
|
|
|
|
|
|
|
Noncumulative nonconvertible |
|
|
|
|
|
|
(48,687 |
) |
Cumulative convertible |
|
|
|
|
|
|
(14,659 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
352,082 |
|
|
|
523,082 |
|
|
|
|
|
|
|
|
|
|
Common Stock: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
1,273 |
|
|
|
621 |
|
Common stock issued/converted: |
|
|
|
|
|
|
|
|
Noncumulative nonconvertible |
|
|
|
|
|
|
40 |
|
Cumulative convertible |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
1,273 |
|
|
|
673 |
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
1,219,280 |
|
|
|
1,010,661 |
|
Stock-based compensation recognized |
|
|
1,703 |
|
|
|
73 |
|
Conversion of preferred stock to common stock at par value: |
|
|
|
|
|
|
|
|
Noncumulative nonconvertible |
|
|
|
|
|
|
17,010 |
|
Cumulative convertible |
|
|
|
|
|
|
19,699 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
1,220,983 |
|
|
|
1,047,443 |
|
|
|
|
|
|
|
|
|
|
Legal Surplus |
|
|
23,596 |
|
|
|
23,596 |
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(738,199 |
) |
|
|
(463,781 |
) |
Net income (loss) |
|
|
7,800 |
|
|
|
(236,814 |
) |
Dividend accrued on preferred stock |
|
|
(4,830 |
) |
|
|
(4,279 |
) |
Effect of conversion of preferred stock: |
|
|
|
|
|
|
|
|
Noncumulative nonconvertible |
|
|
|
|
|
|
31,637 |
|
Cumulative convertible |
|
|
|
|
|
|
(5,052 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(735,229 |
) |
|
|
(678,289 |
) |
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), Net of Tax: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
4,163 |
|
|
|
(111,481 |
) |
Other
comprehensive (loss) income, net of deferred tax |
|
|
(2,608 |
) |
|
|
139,948 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
1,555 |
|
|
|
28,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
864,260 |
|
|
$ |
944,972 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPRENHENSIVE (LOSS) INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, 2011 |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
4,477 |
|
|
$ |
(233,311 |
) |
|
$ |
7,800 |
|
|
$ |
(236,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities arising during the period |
|
|
7,656 |
|
|
|
41,660 |
|
|
|
6,964 |
|
|
|
65,701 |
|
Non-credit portion of OTTI losses |
|
|
(325 |
) |
|
|
|
|
|
|
(325 |
) |
|
|
(26,936 |
) |
Reclassification of net realized (gains) losses included in net income (loss)
|
|
|
(7,462 |
) |
|
|
129,749 |
|
|
|
(11,245 |
) |
|
|
122,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income on investment securities, before tax |
|
|
(131 |
) |
|
|
171,409 |
|
|
|
(4,606 |
) |
|
|
160,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) related to investment securities |
|
|
28 |
|
|
|
(25,712 |
) |
|
|
711 |
|
|
|
(24,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income on investment securities, net of tax |
|
|
(103 |
) |
|
|
145,697 |
|
|
|
(3,895 |
) |
|
|
136,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income on cash flow hedges(1) |
|
|
554 |
|
|
|
1,594 |
|
|
|
1,287 |
|
|
|
3,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
451 |
|
|
|
147,291 |
|
|
|
(2,608 |
) |
|
|
139,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
4,928 |
|
|
$ |
(86,020 |
) |
|
$ |
5,192 |
|
|
$ |
(96,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income on investment securities |
|
$ |
3,794 |
|
|
$ |
36,502 |
|
|
$ |
3,794 |
|
|
$ |
36,502 |
|
Other comprehensive losses on investment securities on which OTTI has been recognized |
|
|
(276 |
) |
|
|
(3,563 |
) |
|
|
(276 |
) |
|
|
(3,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income on investment securities |
|
|
3,518 |
|
|
|
32,939 |
|
|
|
3,518 |
|
|
|
32,939 |
|
Other comprehensive loss on cash flow hedge(1) |
|
|
(1,963 |
) |
|
|
(4,472 |
) |
|
|
(1,963 |
) |
|
|
(4,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income net of tax |
|
$ |
1,555 |
|
|
$ |
28,467 |
|
|
$ |
1,555 |
|
|
$ |
28,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the quarters and six month periods ended June 30, 2011 and 2010, other
comprehensive loss on cash flow hedges includes $0.8 million and $1.7 million related to a
deferred tax asset valuation allowance. |
The accompanying notes are an integral part of these financial statements.
4
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,800 |
|
|
$ |
(236,814 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,703 |
|
|
|
73 |
|
Depreciation and amortization |
|
|
6,666 |
|
|
|
6,257 |
|
Mark-to-market adjustment of servicing assets |
|
|
3,199 |
|
|
|
8,480 |
|
Deferred tax expense |
|
|
2,493 |
|
|
|
3,126 |
|
Provision for loan and lease losses |
|
|
15,914 |
|
|
|
58,538 |
|
Provision for claim receivable |
|
|
|
|
|
|
10,819 |
|
Provision for OREO losses |
|
|
1,375 |
|
|
|
26,391 |
|
Loss (gain) on sale of OREO |
|
|
475 |
|
|
|
(58 |
) |
Net premium amortization on loans, investment securities and debt |
|
|
9,167 |
|
|
|
8,417 |
|
Origination and purchases of loans held for sale |
|
|
(177,825 |
) |
|
|
(160,982 |
) |
Principal repayments and sales of loans held for sale |
|
|
64,849 |
|
|
|
95,065 |
|
(Gain) loss on sale of securities |
|
|
(27,636 |
) |
|
|
108,150 |
|
Net OTTI losses |
|
|
86 |
|
|
|
13,259 |
|
Net loss on early repayment of debt |
|
|
3,068 |
|
|
|
3,021 |
|
Unrealized (gain) loss on trading securities |
|
|
(64 |
) |
|
|
61 |
|
Principal repayment and sales of securities held for trading |
|
|
253,692 |
|
|
|
151,492 |
|
Amortization and net gain in the fair value of IOs |
|
|
500 |
|
|
|
1,011 |
|
Unrealized (gain) loss on derivative instruments |
|
|
(1,021 |
) |
|
|
1,594 |
|
Decrease (increase) in derivative instruments |
|
|
337 |
|
|
|
(5,224 |
) |
(Increase) decrease in accounts receivable |
|
|
(12,888 |
) |
|
|
6,033 |
|
Increase in mortgage servicing advances |
|
|
(2,549 |
) |
|
|
(22,017 |
) |
Decrease in accrued interest receivable |
|
|
1,530 |
|
|
|
882 |
|
Decrease in other assets |
|
|
137,550 |
|
|
|
66,033 |
|
(Decrease) increase in accrued expenses and other liabilities |
|
|
(3,879 |
) |
|
|
65,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
276,742 |
|
|
|
445,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
284,542 |
|
|
|
208,972 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of securities available for sale |
|
|
(234,764 |
) |
|
|
(1,430,635 |
) |
Principal repayment and sales of securities available for sale |
|
|
1,075,068 |
|
|
|
1,852,364 |
|
Proceeds from sale of FHLB stock |
|
|
3,522 |
|
|
|
26,756 |
|
Originations, purchases and repurchases of loans receivable |
|
|
(672,013 |
) |
|
|
(592,890 |
) |
Principal repayment of loans receivable |
|
|
351,265 |
|
|
|
262,558 |
|
Proceeds from sales of servicing assets |
|
|
|
|
|
|
192 |
|
Purchases of premises and equipment |
|
|
(7,068 |
) |
|
|
(4,455 |
) |
Proceeds from sales of real estate held for sale |
|
|
31,430 |
|
|
|
10,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
547,440 |
|
|
|
124,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
(Decrease) increase in deposits |
|
|
(315,683 |
) |
|
|
297,548 |
|
Decrease in securities sold under agreements to repurchase |
|
|
(219,500 |
) |
|
|
(687,483 |
) |
Proceeds from advances from FHLB |
|
|
145,000 |
|
|
|
575,000 |
|
Repayment of advances from FHLB |
|
|
(160,001 |
) |
|
|
(964,000 |
) |
Fees paid on debt exchange and early repayment of debt |
|
|
(65,367 |
) |
|
|
|
|
Proceeds from other short-term borrowings |
|
|
|
|
|
|
345,000 |
|
Repayment of other short-term borrowings |
|
|
|
|
|
|
(455,000 |
) |
Repayment of secured borrowings |
|
|
(9,412 |
) |
|
|
(18,384 |
) |
Repayment of notes payable |
|
|
(3,724 |
) |
|
|
(3,363 |
) |
Issuance of preferred stock |
|
|
|
|
|
|
171,000 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(628,687 |
) |
|
|
(739,682 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
203,295 |
|
|
$ |
(406,328 |
) |
Cash and cash equivalents at beginning of period |
|
|
383,211 |
|
|
|
725,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period (1) |
|
$ |
586,506 |
|
|
$ |
318,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents includes: |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
561,506 |
|
|
$ |
318,949 |
|
Other interest-earning assets |
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
586,506 |
|
|
$ |
318,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
Loan securitizations |
|
$ |
243,719 |
|
|
$ |
148,851 |
|
|
|
|
|
|
|
|
Loans foreclosed |
|
$ |
47,474 |
|
|
$ |
51,965 |
|
|
|
|
|
|
|
|
Capitalization of servicing assets |
|
$ |
4,642 |
|
|
$ |
3,184 |
|
|
|
|
|
|
|
|
Reclassification of loans held for investment portfolio to the held for sale portfolio |
|
$ |
59,917 |
|
|
$ |
95,648 |
|
|
|
|
|
|
|
|
Reclassification of loans held for sale portfolio to the held for investment portfolio |
|
$ |
|
|
|
$ |
210 |
|
|
|
|
|
|
|
|
Substitution of securities sold under agreement to repurchase with advances from FHLB |
|
$ |
515,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Supplemental information for cash flows: |
|
|
|
|
|
|
|
|
Cash used to pay interest |
|
$ |
104,119 |
|
|
$ |
131,546 |
|
|
|
|
|
|
|
|
Cash used to pay income taxes |
|
$ |
3,824 |
|
|
$ |
2,267 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include $19.9 million and $0.3 million in restricted cash and equivalents
as of June 30, 2011 and 2010. |
The accompanying notes are an integral part of these financial statements.
5
DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
Note 1 Nature of Operations and Basis of Presentation |
|
|
7 |
|
Note 2 Recent Accounting Pronouncements |
|
|
7 |
|
Note 3 Cash and Due from Banks |
|
|
9 |
|
Note 4 Other Interest-Earning Assets |
|
|
9 |
|
Note 5 Securities Held for Trading |
|
|
10 |
|
Note 6 Securities Available for Sale |
|
|
11 |
|
Note 7 Investments in an Unrealized Loss Position |
|
|
13 |
|
Note 8 Pledged Assets |
|
|
16 |
|
Note 9 Loans Held for Sale and Loans Receivable |
|
|
16 |
|
Note 10 Allowance for loan and lease losses and Impaired Loans |
|
|
24 |
|
Note 11 Related Party Transactions |
|
|
30 |
|
Note 12 Accounts Receivable and Other Assets |
|
|
30 |
|
Note 13 Servicing Activities |
|
|
30 |
|
Note 14 Sale and Securitization of Mortgage Loans |
|
|
33 |
|
Note 15 Servicing Related Matters |
|
|
34 |
|
Note 16 Other Real Estate Owned |
|
|
34 |
|
Note 17 Deposits |
|
|
34 |
|
Note 18 Securities Sold Under Agreements to Repurchase |
|
|
35 |
|
Note 19 Advances from FHLB |
|
|
36 |
|
Note 20 Loans Payable |
|
|
37 |
|
Note 21 Notes Payable |
|
|
38 |
|
Note 22 Income Taxes |
|
|
38 |
|
Note 23 Guarantees |
|
|
43 |
|
Note 24 Financial Instruments with Off-Balance Sheet Risk |
|
|
44 |
|
Note 25 Commitments and Contingencies |
|
|
45 |
|
Note 26 Stock Options and Other Incentive Plans |
|
|
45 |
|
Note 27 Earnings (Losses) per Share |
|
|
47 |
|
Note 28 Fair Value of Assets and Liabilities |
|
|
48 |
|
Note 29 Derivatives |
|
|
56 |
|
Note 30 Variable Interest Entities |
|
|
59 |
|
Note 31 Segment Information |
|
|
61 |
|
Note 32 Subsequent Events |
|
|
65 |
|
The accompanying notes are an integral part of these financial statements.
6
1. Nature of Operations and Basis of Presentation
Doral Financial Corporation (Doral, Doral Financial or the Company) is a bank holding company
engaged in banking (including thrift operations), mortgage banking and insurance agency activities
through its wholly-owned subsidiaries Doral Bank (Doral Bank PR), Doral Bank, FSB (Doral Bank
US), a federal savings bank in New York and since 2010 in the northwest region of Florida, Doral
Insurance Agency, Inc. (Doral Insurance Agency), and Doral Properties, Inc. (Doral Properties).
Doral Bank PR operates three wholly-owned subsidiaries, Doral Mortgage, LLC (Doral Mortgage),
Doral Money, Inc. (Doral Money), engaged in commercial lending in the New York metropolitan area,
and CB, LLC, an entity formed to dispose of a real estate project of which Doral Bank PR took
possession during 2005. Doral Money consolidates two variable interest entities created for the
purpose of entering into a collateralized loan arrangement with a third party.
Doral Investment International, LLC (Doral Investment) was organized during 2008 to become a
subsidiary of Doral Bank PR, but is not operational.
The accompanying Consolidated Financial Statements (unaudited) have been prepared in conformity
with the accounting policies stated in the Companys Annual Audited Consolidated Financial
Statements included in the Companys Annual Report on Form 10-K for the year ended December 31,
2010. Certain information and note disclosure normally included in the financial statements
prepared in accordance with generally accepted accounting principles in the United States of
America (GAAP) have been condensed or omitted from these statements pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, accordingly, these financial
statements should be read in conjunction with the audited Consolidated Financial Statements of the
Company for the year ended December 31, 2010 included in the Companys 2010 Annual Report on Form
10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of the results for the interim periods have been
reflected. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain amounts reflected in the 2010 Consolidated Financial Statements have been reclassified to
conform with the presentation for 2011.
The results of operations for the quarter and six month period ended June 30, 2011 are not
necessarily indicative of the results to be expected for the full year.
2. Recent Accounting Pronouncements
Accounting Standards Update No. 2011-5 Comprehensive Income (Topic 220):
Presentation of Comprehensive Income (ASU No. 2011-5). In June 2011, FASB issued ASU No. 2011-5
to eliminate the option to present components of other comprehensive income as part of the
statement of changes in stockholders equity. In addition, this amendment requires all changes in
items not related to owners in stockholders equity be presented either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In the two
statement approach, the first statement shall present total net income and its components followed
by a second statement presenting total other comprehensive income, the components of other
comprehensive income, and the total of comprehensive income. The purpose of this update is to
increase prominence of items reported in other comprehensive income. The provisions of ASU No.
2011-5 should be applied retrospectively and are effective for the Company during interim and
annual periods beginning after December 15, 2011. The adoption of this ASU will not impact the
Companys financial position or results of operations.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs (ASU No. 2011-4). In May 2011, the FASB issued ASU No. 2011-4 to amend fair value
disclosure requirements in order to achieve common fair value measurement and disclosure
requirements in U.S. GAAP and IFRSs. Some of the amendments clarify the application of existing
fair value measurement requirements while other amendments change a particular principle or
requirement for measuring fair value or for disclosing information about fair value measurements.
The amendments clarify the application of the highest and best use and valuation premise concepts,
measuring the fair value of financial instruments that are managed within a portfolio and
application of premiums and discounts in a fair value measurement. The amendments additionally
prescribe enhanced financial statement disclosures for Level 3 fair value measurements. The
provisions of ASU No. 2011-4 are effective for the Company during interim and annual periods
beginning after December 15, 2011. The Company is evaluating the potential impact, if any, that the
adoption of this ASU will have on its financial position and results of operations.
Accounting Standards Update No. 2011-03 Transfers and Servicing (Topic 860). In April 2011, the
FASB issued ASU No. 2011-03, to improve the accounting for repurchase agreements and other
agreements that both entitle and obligate a transferor to repurchase or redeem financial assets
before their maturity.
7
The amendments in this Update remove from the assessment of effective control (i) the criterion
requiring the transferor to have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by the transferee, and (ii) the
collateral maintenance implementation guidance related to that criterion. Other criteria applicable
to the assessment of effective control are not changed by the amendments in this Update. Those
criteria indicate that the transferor is considered to have maintained effective control over the
financial assets transferred (and thus must account for the transaction as a secured borrowing) for
agreements that both entitle and obligate the transferor to repurchase or redeem the financial
assets before their maturity if all of the following conditions are met:
|
1. |
|
The financial assets to be repurchased or redeemed are the same or substantially the same as
those transferred. |
|
|
2. |
|
The agreement is to repurchase or redeem them before maturity, at a fixed or determinable
price. |
|
|
3. |
|
The agreement is entered into contemporaneously with, or in contemplation of, the transfer. |
The guidance in this Update is effective for the first interim or annual period beginning on or
after December 15, 2011. The guidance should be applied prospectively to transactions or
modifications of existing transactions that occur on or after the effective date. Early adoption is
not permitted. Management does not expect the implementation of this standard to have a material
effect on the financial statements.
Changes in Accounting Standards Adopted in the Financial Statements
Accounting Standards Update No. 2011-02Receivables (Topic 310): A Creditors Determination of
Whether a Restructuring Is a Troubled Debt Restructuring. On April 4, 2011, the FASB issued ASU No.
2011-02, which amends guidance for evaluating whether the restructuring of a receivable by a
creditor is a troubled debt restructuring (TDR). In addition, disclosures required by paragraphs
310-10-50-33 through 50-34, which were deferred by ASU No. 2011-01, Deferral of the Effective Date
of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 are effective for
interim and annual periods beginning on or after June 15, 2011.
The amendments in this update are effective for the first interim or annual period beginning on or
after June 15, 2011, and require applying retrospectively to the beginning of the annual period of
adoption. As a result of applying these amendments, an entity may identify receivables that are
newly considered impaired. For purposes of measuring impairment of those receivables, an entity
should apply the amendments prospectively for the first interim or annual period beginning on or
after June 15, 2011. An entity should disclose the total amount of receivables and the allowance
for credit losses as of the end of the period of adoption related to those receivables that are
newly considered impaired under Section 310-10-35 for which impairment was previously measured
under Subtopic 450-20, Contingencies-Loss Contingencies. This ASU was adopted by the Company in its
financial statement disclosures with no impact on the financial statements.
Accounting Standards Update No. 2010-29 Business Combinations (Topic 805): Disclosures of
Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging
Issues Task Force). In December 2010, FASB issued ASU No. 2010-29 to address diversity in practice
about the interpretation of the pro forma revenue and earnings disclosure requirements for business
combinations. The amendments in this update clarify the acquisition date that should be used for
reporting the pro forma financial information disclosures in Topic 805 when comparative financial
statements are presented. The amendments also improve the usefulness of the pro forma revenue and
earnings disclosures by requiring a description of the nature and amount of material, nonrecurring
pro forma adjustments that are directly attributable to the business combination(s).
The amendments in this update are effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2010. Early adoption is permitted. This ASU was adopted by the Company with no
impact on the financial statements.
Accounting Standards Update No. 2010-28 Intangibles-Goodwill and Other (Topic 350): When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
(a consensus of the FASB Emerging Issues Task Force). In December 2010, FASB issued ASU No. 2010-28
to address questions about entities with reporting units with zero or negative carrying amounts
because some entities concluded that Step 1 of the test is passed in those circumstances because
the fair value of their reporting unit will generally be greater than zero. As a result of that
conclusion, some constituents raised concerns that Step 2 of the test is not performed despite
factors indicating that goodwill may be impaired. The amendments in this Update modify Step 1 of
the goodwill impairment test for reporting units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is
more likely than not that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The qualitative factors are consistent
with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of
a reporting unit be tested for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount.
8
For public entities, the amendments in this Update are effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010. Early adoption is not permitted.
Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are
zero or negative is required to assess whether it is more likely than not that the reporting units
goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of
one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill
impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded
as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any
goodwill impairments occurring after the initial adoption of the amendments should be included in
earnings as required by Section 350-20-35. This ASU was adopted by the Company with no significant
impact on the financial statements.
Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses (ASU No. 2010-20). This ASU
requires new disclosures and clarifies existing disclosure requirements about an entitys allowance
for credit losses and credit quality of its financing receivables. The FASBs objective is to
improve these disclosures and, thus, increase the transparency in financial reporting, as well as
clarify the requirements of existing disclosures. ASU 2010-20 is effective the first fiscal quarter
ending after December 15, 2010, except for certain disclosure requirements about activity that
occurs during a reporting period which are effective the first fiscal quarter beginning after
December 15, 2010. This ASU was adopted by the Company and is reflected in the enhanced disclosures
in the financial statements.
3. Cash and due from banks
At June 30, 2011 and December 31, 2010, the Companys cash amounted to $562.4 million and $355.8
million, respectively, which includes non-interest bearing deposits with other banks amounting to
$1.6 million and $10.4 million, respectively. The Companys cash balances included interest
bearing balances with the Federal Reserve of $522.1 million and $218.9 million, respectively, and
with the Federal Home Loan Bank of $4.3 million and $92.0 million, respectively.
The Companys bank subsidiaries are required by federal and state regulatory agencies to maintain
average reserve balances with the Federal Reserve Bank or other banks. Those required average
reserve balances were $146.2 million and $115.9 million as of June 30, 2011 and December 31, 2010,
respectively.
As of June 30, 2011 and December 31, 2010, cash and due from banks included $0.9 million and $2.6
million, respectively, that is considered restricted cash.
4. Other Interest-Earning Assets
At June 30, 2011 and December 31, 2010, the Companys other interest-earning assets totaled $44.0
million and $156.6 million, respectively. Other interest-earning assets includes money market
investments, securities purchased under agreements to resell, cash pledged with counterparties to
back the Companys securities sold under agreements to repurchase and/or derivatives positions,
among others.
As of June 30, 2011 and December 31, 2010, other interest-earning assets included $19.0 million and
$126.6 million, respectively, that was considered restricted other interest-earning assets.
9
5. Securities Held for Trading
The following table summarizes the fair value of Doral Financials securities held for trading as
of June 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Mortgage-Backed Securities |
|
$ |
830 |
|
|
$ |
766 |
|
Variable Rate IOs |
|
|
43,552 |
|
|
|
44,018 |
|
Fixed Rate IOs |
|
|
198 |
|
|
|
232 |
|
Derivatives (1) |
|
|
9 |
|
|
|
13 |
|
|
|
|
|
|
|
|
Total |
|
$ |
44,589 |
|
|
$ |
45,029 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Doral Financial uses derivatives to manage its exposure to interest rate risk caused
by changes in interest rates. Derivatives include interest rate caps and forward contracts.
Doral Financials general policy is to account for derivatives on a mark-to-market basis with
gains or losses charged to operations as they occur. Derivatives not accounted for as hedges
in a net asset position are recorded as securities held for trading, and derivatives in a net
liability position are reported as liabilities. The gross notional amount of derivatives
recorded as held for trading totaled $265.0 million as of June 30, 2011 and $310.0 million as
of December 31, 2010. Notional amounts indicate the volume of derivatives activity, but do not
represent Doral Financials exposure to market or credit risk. |
The weighted-average yield is computed based on amortized cost and, therefore, does not give
effect to changes in fair value. As of June 30, 2011 and December 31, 2010 weighted-average yield,
including IOs, was 13.48% and 13.38%, respectively.
10
6. Securities Available for Sale
The following tables summarize the amortized cost, gross unrealized gains and losses, approximate
fair value, weighted-average yield and contractual maturities of securities available for sale as
of June 30, 2011 and December 31, 2010.
The weighted-average yield is computed based on amortized cost and, therefore, does not give effect
to changes in fair value. Expected maturities of mortgage-backed securities and certain debt
securities might differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Average |
|
(Dollars in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Yield |
|
Agency MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7 |
|
|
|
6.60 |
% |
Due from one to five years |
|
|
195 |
|
|
|
9 |
|
|
|
|
|
|
|
204 |
|
|
|
4.84 |
% |
Due from five to ten years |
|
|
68,166 |
|
|
|
1,501 |
|
|
|
|
|
|
|
69,667 |
|
|
|
2.74 |
% |
Due over ten years |
|
|
372,161 |
|
|
|
5,114 |
|
|
|
197 |
|
|
|
377,078 |
|
|
|
3.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO Government Sponsored Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from five to ten years |
|
|
7,116 |
|
|
|
46 |
|
|
|
140 |
|
|
|
7,022 |
|
|
|
4.85 |
% |
Due over ten years |
|
|
100,723 |
|
|
|
2,115 |
|
|
|
230 |
|
|
|
102,608 |
|
|
|
3.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due over ten years |
|
|
11,153 |
|
|
|
|
|
|
|
3,193 |
|
|
|
7,960 |
|
|
|
17.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations U.S. Government Sponsored Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
|
94,947 |
|
|
|
35 |
|
|
|
|
|
|
|
94,982 |
|
|
|
0.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from one to five years |
|
|
5,002 |
|
|
|
|
|
|
|
1 |
|
|
|
5,001 |
|
|
|
3.45 |
% |
Due over ten years |
|
|
7,843 |
|
|
|
10 |
|
|
|
931 |
|
|
|
6,922 |
|
|
|
4.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
667,313 |
|
|
$ |
8,830 |
|
|
$ |
4,692 |
|
|
$ |
671,451 |
|
|
|
3.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Average |
|
(Dollars in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Yield |
|
Agency MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
36 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
37 |
|
|
|
6.67 |
% |
Due from one to five years |
|
|
220 |
|
|
|
11 |
|
|
|
|
|
|
|
231 |
|
|
|
4.87 |
% |
Due from five to ten years |
|
|
416,709 |
|
|
|
3,447 |
|
|
|
130 |
|
|
|
420,026 |
|
|
|
2.47 |
% |
Due over ten years |
|
|
718,690 |
|
|
|
4,949 |
|
|
|
960 |
|
|
|
722,679 |
|
|
|
2.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO Government Sponsored Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from five to ten years |
|
|
17,953 |
|
|
|
122 |
|
|
|
178 |
|
|
|
17,897 |
|
|
|
4.10 |
% |
Due over ten years |
|
|
288,414 |
|
|
|
6,750 |
|
|
|
230 |
|
|
|
294,934 |
|
|
|
3.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due over ten years |
|
|
11,108 |
|
|
|
|
|
|
|
3,916 |
|
|
|
7,192 |
|
|
|
19.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations U.S. Government Sponsored Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
|
34,987 |
|
|
|
5 |
|
|
|
|
|
|
|
34,992 |
|
|
|
0.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due over ten years |
|
|
8,203 |
|
|
|
|
|
|
|
1,126 |
|
|
|
7,077 |
|
|
|
4.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,496,320 |
|
|
$ |
15,285 |
|
|
$ |
6,540 |
|
|
$ |
1,505,065 |
|
|
|
2.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
7. Investments in an Unrealized Loss Position
The following tables show Doral Financials gross unrealized losses and fair value for available
for sale investments, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31,
2010:
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
Unrealized |
|
|
of |
|
|
|
|
|
|
Unrealized |
|
|
of |
|
|
|
|
|
|
Unrealized |
|
(Dollars in thousands) |
|
Positions |
|
|
Fair Value |
|
|
Losses |
|
|
Positions |
|
|
Fair Value |
|
|
Losses |
|
|
Positions |
|
|
Fair Value |
|
|
Losses |
|
Agency MBS |
|
|
1 |
|
|
$ |
16,244 |
|
|
$ |
197 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
1 |
|
|
$ |
16,244 |
|
|
$ |
197 |
|
CMO Government
Sponsored Agencies |
|
|
1 |
|
|
|
3,538 |
|
|
|
230 |
|
|
|
1 |
|
|
|
1,554 |
|
|
|
140 |
|
|
|
2 |
|
|
|
5,092 |
|
|
|
370 |
|
Non-Agency CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
7,960 |
|
|
|
3,193 |
|
|
|
3 |
|
|
|
7,960 |
|
|
|
3,193 |
|
Other |
|
|
1 |
|
|
|
5,001 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2,069 |
|
|
|
931 |
|
|
|
2 |
|
|
|
7,070 |
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
$ |
24,783 |
|
|
$ |
428 |
|
|
|
5 |
|
|
$ |
11,583 |
|
|
$ |
4,264 |
|
|
|
8 |
|
|
$ |
36,366 |
|
|
$ |
4,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
Unrealized |
|
|
of |
|
|
|
|
|
|
Unrealized |
|
|
of |
|
|
|
|
|
|
Unrealized |
|
(Dollars in thousands) |
|
Positions |
|
|
Fair Value |
|
|
Losses |
|
|
Positions |
|
|
Fair Value |
|
|
Losses |
|
|
Positions |
|
|
Fair Value |
|
|
Losses |
|
Agency MBS |
|
|
13 |
|
|
$ |
241,675 |
|
|
$ |
1,090 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
13 |
|
|
$ |
241,675 |
|
|
$ |
1,090 |
|
CMO Government
Sponsored Agencies |
|
|
2 |
|
|
|
11,564 |
|
|
|
255 |
|
|
|
1 |
|
|
|
1,704 |
|
|
|
153 |
|
|
|
3 |
|
|
|
13,268 |
|
|
|
408 |
|
Non-Agency CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
7,192 |
|
|
|
3,916 |
|
|
|
3 |
|
|
|
7,192 |
|
|
|
3,916 |
|
Other |
|
|
1 |
|
|
|
5,162 |
|
|
|
41 |
|
|
|
1 |
|
|
|
1,915 |
|
|
|
1,085 |
|
|
|
2 |
|
|
|
7,077 |
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
$ |
258,401 |
|
|
$ |
1,386 |
|
|
|
5 |
|
|
$ |
10,811 |
|
|
$ |
5,154 |
|
|
|
21 |
|
|
$ |
269,212 |
|
|
$ |
6,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities held by the Company are principally MBS or securities backed by a U.S.
government sponsored entity and therefore, principal and interest on the securities are considered
recoverable. Doral Financials investment portfolio consists primarily of AAA rated debt
securities, except for the Non-Agency Collateralized Mortgage Obligations (CMO), which are
non-investment grade.
The Company assesses whether a security is other than temporarily impaired (OTTI) whenever the
fair value of an investment security is less than its amortized cost basis at the balance sheet
date. Amortized cost basis includes adjustments made to the cost of a security for accretion,
amortization, collection of cash, previous OTTI recognized into earnings (less any cumulative
effect adjustments) and fair value hedge accounting adjustments. OTTI is considered to have
occurred under the following circumstances:
|
|
If the Company intends to sell the investment security and its fair value is less than its
amortized cost. |
|
|
If, based on available evidence, it is more likely than not that the Company will decide or
be required to sell the investment security before the recovery of its amortized cost basis. |
|
|
If the Company does not expect to recover the entire amortized cost basis of the investment
security. This occurs when the present value of cash flows expected to be collected is less
than the amortized cost basis of the security. In determining whether a credit loss exists,
the Company uses its best estimate of the present value of cash flows expected to be collected
from the investment security. Cash flows expected to be collected are estimated based on a
careful assessment of all available information. The amount of estimated credit loss is
determined as the amount by which the amortized cost basis exceeds the present value of
expected cash flows. |
13
The Company evaluates its individual available for sale investment securities for OTTI on at least
a quarterly basis. As part of this process, the Company considers its intent to sell each
investment security and whether it is more likely than not that it will be required to sell the
security before its anticipated recovery. If either of these conditions is met, the Company
recognizes an OTTI charge to earnings equal to the entire difference between the securitys
amortized cost basis and its fair value at the balance sheet date. For securities that meet neither
of these conditions, an analysis is performed to determine if any of these securities are at risk
for OTTI. To determine which securities are at risk for OTTI and should be quantitatively evaluated
utilizing a detailed cash flow analysis, the Company evaluates certain indicators which consider
various characteristics of each security including, but not limited to, the following: the credit
rating and related outlook or status of the securities; the creditworthiness of the issuers of the
securities; the value and type of underlying collateral; the duration and level of the unrealized
loss; any credit enhancements; and other collateral-related characteristics such as the ratio of
credit enhancements to expected credit losses. The relative importance of this information varies
based on the facts and circumstances surrounding each security, as well as the economic environment
at the time of assessment. The amount of estimated credit loss, which is charged to earnings, is
determined as the amount by which the amortized cost basis exceeds the present value of expected
cash flows.
As a result of its review of the portfolio as of June 30, 2011, the Company performed a detailed
cash flow analysis of certain securities in unrealized loss to assess whether they were OTTI. The
Company uses a third party provider to generate cash flow forecasts of each security reviewed based
on a combination of management and market driven assumptions and securitization terms, including
remaining payment terms of the security, prepayment speeds, the estimated amount of loans to become
seriously delinquent over the life of the security, the estimated life-time severity
rate, estimated losses over the life of the security, loan characteristics, the level of
subordination within the security structure, expected housing price changes and interest rate
assumptions. During the six month period ended June 30, 2011 an OTTI adjustment of $0.1 million was
recognized on securities from the P.R. Non-Agency CMO portfolio with an amortized cost of $2.8
million. It is possible that future loss assumptions could change and cause future OTTI charges in
these securities.
Higher default and loss assumptions driven by higher delinquencies in Puerto Rico, primarily due to
the impact of inflationary pressures on the consumer, the high rate of unemployment and general
recessionary condition on the Island, has resulted in higher default and loss estimates on the P.R.
Non-Agency CMOs bonds. The higher default and loss estimates have resulted in lower bond prices and
higher levels of unrealized losses on the bonds.
During the quarter ended March 31, 2010, it was determined that six securities reflected OTTI. Five
of these securities are subordinated interests in a securitization structure collateralized by
option adjustable rate mortgage (ARM) loans. The characteristics of these six securities that led
to the OTTI conclusion included: i) the cumulative level and estimated future delinquency levels,
ii) the effect of severely delinquent loans on forecasted defaults, iii) the cumulative severity
and expected severity in resolving the defaulted loans, and iv) the current subordination of the
securities that resulted in the present value of the forecast cash flows being less than the cost
basis of the security. Management estimated that credit losses of $13.3 million had been incurred
on these securities with an amortized cost of $313.9 million as of March 31, 2010.
In April 2010, the Company was approved by the Federal Deposit Insurance Corporation (the FDIC)
to bid for the assets and liabilities of certain Puerto Rico domiciled banks. As a condition to
bid, the Company was required by the federal bank regulatory agencies to comply with certain
financial ratios. To comply with the prescribed ratios, the Company could take a number of
alternative actions including raising additional capital, disposing of non-performing loans,
disposing of certain non-agency securities, shrinking the Company, or a combination of the
preceding. On April 23, 2010, the Company sold the five securities mentioned above and recognized a
loss of $136.7 million, of which $129.7 million had previously been reflected in other
comprehensive income (loss). If the Company were not bidding for the assets and liabilities of
certain failed banks, the Company would not have elected to sell the non-agency securities as it
had the positive intent and the ability to hold the securities to maturity or until principal
recovered.
As of June 30, 2011, the Company did not intend to sell the securities which were evaluated for
OTTI and concluded it was not more likely than not that it would be required to sell these
securities before the anticipated recovery of each securitys remaining amortized cost basis.
Therefore, the difference between the amortized cost basis and the market value of the securities
is recorded in accumulated other comprehensive income.
For the remainder of the Companys securities portfolio that have experienced decreases in the fair
value, the decline is considered to be temporary as the Company expects to recover the entire
amortized cost basis on the securities and neither intends to sell these securities nor is it more
likely than not that it will be required to sell these securities.
In subsequent periods the Company will account for the securities judged to be OTTI as if the
securities had been purchased at the previous amortized cost less the credit related OTTI. Once a
credit loss is recognized, the investment will be adjusted to a new amortized cost basis equal to
the previous amortized cost basis less the amount recognized in earnings. For the investment
securities for which OTTI was recognized in earnings, the difference between the new amortized cost
basis and the cash flows
14
expected to be collected will be accreted as interest income.
The following table presents the securities for which an OTTI was recognized based on the Companys
impairment analysis of its investment portfolio at June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
Quarter Ended |
|
|
Six Month Period Ended |
|
|
|
June 30, 2011 |
|
|
June 30, 2011 |
|
|
June 30, 2011 |
|
|
|
Amortized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost (after |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
OTTI Related |
|
|
Total |
|
|
|
|
|
|
OTTI Related |
|
|
Total |
|
|
|
credit related |
|
|
Unrealized |
|
|
|
|
|
|
OTTI Related |
|
|
to Non-Credit |
|
|
Impairment |
|
|
OTTI Related |
|
|
to Non-Credit |
|
|
Impairment |
|
(In thousands) |
|
OTTI) |
|
|
Losses |
|
|
Fair Value |
|
|
to Credit Loss |
|
|
Loss |
|
|
Losses |
|
|
to Credit Loss |
|
|
Loss |
|
|
Losses |
|
OTTI Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Non-Agency CMOs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
P.R. Non-Agency CMOs |
|
|
11,153 |
|
|
|
3,193 |
|
|
|
7,960 |
|
|
|
86 |
|
|
|
325 |
|
|
|
411 |
|
|
|
86 |
|
|
|
325 |
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,153 |
|
|
$ |
3,193 |
|
|
$ |
7,960 |
|
|
$ |
86 |
|
|
$ |
325 |
|
|
$ |
411 |
|
|
$ |
86 |
|
|
$ |
325 |
|
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
Quarter Ended |
|
|
Six Month Period Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
|
Amortized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost (after |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
OTTI Related |
|
|
Total |
|
|
|
|
|
|
OTTI Related |
|
|
Total |
|
|
|
credit related |
|
|
Unrealized |
|
|
|
|
|
|
OTTI Related |
|
|
to Non-Credit |
|
|
Impairment |
|
|
OTTI Related |
|
|
to Non-Credit |
|
|
Impairment |
|
(In thousands) |
|
OTTI) |
|
|
Losses |
|
|
Fair Value |
|
|
to Credit Loss |
|
|
Loss |
|
|
Losses |
|
|
to Credit Loss |
|
|
Loss |
|
|
Losses |
|
OTTI Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Non-Agency CMOs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,257 |
|
|
$ |
26,840 |
|
|
$ |
40,097 |
|
P.R. Non-Agency CMOs |
|
|
8,156 |
|
|
|
3,629 |
|
|
|
4,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
96 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,156 |
|
|
$ |
3,629 |
|
|
$ |
4,527 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,259 |
|
|
$ |
26,936 |
|
|
$ |
40,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents activity related to the credit losses recognized in earnings on debt securities held by the Company for which a portion of OTTI
remains in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
2,816 |
|
|
$ |
1,193 |
|
|
$ |
2,816 |
|
|
$ |
1,191 |
|
Additions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses for which OTTI was not previously recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional OTTI credit losses for which an
other-than-temporary charge was previously recognized |
|
|
86 |
|
|
|
|
|
|
|
86 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,902 |
|
|
$ |
1,193 |
|
|
$ |
2,902 |
|
|
$ |
1,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company will continue to monitor and analyze the performance of its securities to assess
the collectability of principal and interest as of each balance sheet date. As conditions in the
housing and mortgage markets continue to change over time, the amount of projected credit losses
could also change. Valuation and OTTI determinations will continue to be affected by external
market factors including default rates, severity rates, and macro-economic factors in the United
States and Puerto Rico. Doral Financials future results may be materially affected by worsening
defaults and severity rates related to the underlying collateral.
15
8. Pledged Assets
At June 30, 2011 and December 31, 2010, certain securities and loans, as well as cash and other
interest-earning assets, were pledged to secure public and trust deposits, assets sold under
agreements to repurchase, other borrowings and credit facilities available.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Cash |
|
$ |
890 |
|
|
$ |
2,642 |
|
Other interest-earning assets |
|
|
18,967 |
|
|
|
126,573 |
|
Securities available for sale |
|
|
631,257 |
|
|
|
1,458,992 |
|
Loans held for sale |
|
|
119,729 |
|
|
|
121,988 |
|
Loans receivable |
|
|
2,344,012 |
|
|
|
2,388,428 |
|
|
|
|
|
|
|
|
Total pledged assets |
|
$ |
3,114,855 |
|
|
$ |
4,098,623 |
|
|
|
|
|
|
|
|
9. Loans Held for Sale and Loans Receivable
Loans held for sale consist of the following:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Conventional single family residential (1) |
|
$ |
110,524 |
|
|
$ |
119,290 |
|
FHA/VA |
|
|
165,176 |
|
|
|
172,216 |
|
Commercial loans to financial institutions |
|
|
13,598 |
|
|
|
14,608 |
|
Commercial real estate |
|
|
12,636 |
|
|
|
13,155 |
|
|
|
|
|
|
|
|
Total loans held for sale (2)(3) |
|
$ |
301,934 |
|
|
$ |
319,269 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At both June 30, 2011 and December 31, 2010, includes $0.1 million related to U.S.
subsidiaries loans. |
|
(2) |
|
At both, June 30, 2011 and December 31, 2010, the loans held for sale portfolio
include $1.1 million of interest-only loans. |
|
(3) |
|
Includes $19.6 million and $21.4 million of balloon loans, as of June 30, 2011 and
December 31, 2010, respectively. |
At June 30, 2011 and December 31, 2010, the loans held for sale portfolio included $148.1
million and $153.4 million, respectively, of defaulted loans collateralizing Ginnie Mae (GNMA)
securities for which the Company has an unconditional option (but not an obligation) to repurchase
the defaulted loans. Payment of principal and a portion of the interest on these loans is
guaranteed by the Federal Housing Administration (FHA).
As of June 30, 2011 and December 31, 2010, the Company had a net deferred origination fee on loans
held for sale amounting to approximately $1.0 million and $0.7 million, respectively.
Non-performing loans held for sale totaled $2.5 million and $2.7 million as of June 30, 2011 and
December 31, 2010, respectively.
Dorals exposure to credit risk associated with its lending activities is measured on a customer
basis as well as by groups of customers that share similar attributes. In the normal course of
business, the Company has a concentration of loan credit risk in Puerto Rico and the mainland U.S.,
with the preponderance of its loans held for investment credit exposure in Puerto Rico.
16
The table below presents the Companys loans receivable by product and geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
Residential mortgage (1) |
|
$ |
3,406,704 |
|
|
$ |
131,200 |
|
|
$ |
3,537,904 |
|
|
$ |
3,451,895 |
|
|
$ |
108,641 |
|
|
$ |
3,560,536 |
|
FHA/VA guaranteed residential mortgage |
|
|
132,657 |
|
|
|
|
|
|
|
132,657 |
|
|
|
187,473 |
|
|
|
|
|
|
|
187,473 |
|
Consumer Loans |
|
|
46,324 |
|
|
|
31 |
|
|
|
46,355 |
|
|
|
54,354 |
|
|
|
26 |
|
|
|
54,380 |
|
Lease financing receivables |
|
|
2,762 |
|
|
|
|
|
|
|
2,762 |
|
|
|
4,807 |
|
|
|
|
|
|
|
4,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
3,588,447 |
|
|
|
131,231 |
|
|
|
3,719,678 |
|
|
|
3,698,529 |
|
|
|
108,667 |
|
|
|
3,807,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
597,954 |
|
|
|
68,626 |
|
|
|
666,580 |
|
|
|
629,043 |
|
|
|
59,903 |
|
|
|
688,946 |
|
Commercial and industrial |
|
|
38,384 |
|
|
|
874,036 |
|
|
|
912,420 |
|
|
|
36,639 |
|
|
|
597,056 |
|
|
|
633,695 |
|
Construction and land |
|
|
309,590 |
|
|
|
80,330 |
|
|
|
389,920 |
|
|
|
349,899 |
|
|
|
108,835 |
|
|
|
458,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
945,928 |
|
|
|
1,022,992 |
|
|
|
1,968,920 |
|
|
|
1,015,581 |
|
|
|
765,794 |
|
|
|
1,781,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross (2) |
|
|
4,534,375 |
|
|
|
1,154,223 |
|
|
|
5,688,598 |
|
|
|
4,714,110 |
|
|
|
874,461 |
|
|
|
5,588,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
(87,592 |
) |
|
|
(5,880 |
) |
|
|
(93,472 |
) |
|
|
(117,821 |
) |
|
|
(5,831 |
) |
|
|
(123,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,446,783 |
|
|
$ |
1,148,343 |
|
|
$ |
5,595,126 |
|
|
$ |
4,596,289 |
|
|
$ |
868,630 |
|
|
$ |
5,464,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $576.5 million and $565.9 million of balloon loans, as of June 30,
2011 and December 31, 2010, respectively. |
|
(2) |
|
Includes $405.8 million and $442.6 million of interest-only loans, as of
June 30, 2011 and December 31, 2010, respectively. |
As of June 30, 2011 and December 31, 2010, the Company had a net deferred origination fee on
loans held for investment amounting to approximately $23.8 million and $24.0 million, respectively.
The Company has not traditionally made variable interest rate residential mortgage loans, option
adjustable rate mortgages, or many of the higher risk mortgage loans made by a number of U.S.
mainland banks. However, as part of its loss mitigation programs, the Company has granted certain
concessions to borrowers in financial difficulties that have proven payment capacity which may
include interest only periods or temporary interest rate reductions. Loans with temporarily reduced
principal and interest payments may be subject to significant increases in loan payments as the
temporary payment periods end which may lead to higher level of re-defaults. Doral works with the
borrowers to establish terms and conditions (prior to the payment date) in order to optimize the
Companys interests.
Non-accrual and Past Due Loans and Leases
Doral recognizes interest income on loans receivable on an accrual basis unless it is determined
that collection of all contractual principal or interest is unlikely. Doral discontinues
recognition of interest income, when a loan receivable is delinquent on principal or interest for
more than 90 days, except for revolving lines of credit and credit cards (non-accrual at 180 days),
mortgage loans insured by FHA/VA (non-accrual at 270 days), and certain loans determined to be well
collateralized so that ultimate collection of principal and interest is not in question (for
example, when the outstanding loan and interest balance as a percentage of current collateral value
is less than 60%). When a loan is placed on non-accrual, all accrued but unpaid interest is
reversed against interest income in that period. Loans return to accrual status when principal and
interest are current under the terms of the loan agreement, or when the loan is both well-secured
and in the process of collection and collectability is no longer doubtful. In the case of loans
under troubled debt restructuring agreements, the Company continues to place the loans in
non-accrual status and reports the loans as non-performing loans unless the Company expects to
collect all contractual principal and interest and the loans have proven repayment capacity for a
sufficient amount of time. Previously reversed or not accrued interest will be credited to income
in the period of recovery. Interest income is recognized when a payment is received on a
non-accrual loan if ultimate collection of principal is not in doubt.
Accrued interest receivable on impaired loans is reversed when a loan is placed on non-accrual
status. Interest collections on non-accruing loans, for which the ultimate collectability of
principal is uncertain, are applied as principal reductions; otherwise, such collections are
credited to interest income when received. These loans may be restored to accrual status when all
principal and interest is current and full repayment of the remaining contractual principal and
interest is expected, or when the loan otherwise becomes well-secured and is in the process of
collection. Loans whose contractual terms have been modified in a TDR and are
17
current at the time of restructuring remain on accrual status if there is demonstrated performance
prior to the restructuring and payment in full under the restructured terms is expected.
Otherwise, the loans are placed on non-accrual status and reported as non-performing until there is
sustained repayment performance for a reasonable period.
For consumer loans (primarily residential real estate), all of Dorals loss mitigation tools
require that the borrower demonstrate the intent and ability to pay all principal and interest on
the loan. Doral must receive at least three consecutive monthly payments prior to qualifying the
borrower for a loss mitigation product. Dorals loss mitigation specialists must be reasonably
assured of the borrowers future repayment and performance from their review of the borrowers
circumstances, and when all the conditions are
met, the customer is approved for a loss mitigation product, placed on a probation period and the
loan is returned to accrual status. On a monthly basis Doral reviews the loan to ensure that
payments are made during the probationary period. If a payment is not made during this probationary
period the loan is immediately returned to non-accrual status. Also, if a payment is missed during
the probationary period, the loan reverts to its original terms, and collections/foreclosure
procedures begin from the point at which they stood prior to the restructure. Consumer loans not
delinquent 90 days or more that are eligible for loss mitigation products are subject to the same
requirements as the delinquent consumer loans, except that the requirement of making three
consecutive payments prior to the restructure is waived.
For commercial loan loss mitigation (which includes commercial real estate, commercial and
industrial and construction and land loans), the loans are underwritten by the Collections
function, the intent and ability of the borrower to service the debt under the revised terms is
studied, and if approved for the troubled debt restructuring, the customer is placed on a six month
probationary period during which the customer is required to make six consecutive payments (or the
equivalent in a lump sum) before the loan is returned to accrual status.
Loans receivable on which accrual of interest income had been discontinued as of June 30, 2011 and
December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(In thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
277,501 |
|
|
$ |
685 |
|
|
$ |
278,186 |
|
|
$ |
276,328 |
|
|
$ |
2,030 |
|
|
$ |
278,358 |
|
Lease financing receivables |
|
|
199 |
|
|
|
|
|
|
|
199 |
|
|
|
415 |
|
|
|
|
|
|
|
415 |
|
Other consumer (1) |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
404 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
278,200 |
|
|
|
685 |
|
|
|
278,885 |
|
|
|
277,147 |
|
|
|
2,030 |
|
|
|
279,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
167,138 |
|
|
|
|
|
|
|
167,138 |
|
|
|
193,348 |
|
|
|
|
|
|
|
193,348 |
|
Construction and land |
|
|
107,516 |
|
|
|
1,610 |
|
|
|
109,126 |
|
|
|
147,127 |
|
|
|
1,610 |
|
|
|
148,737 |
|
Commercial and industrial |
|
|
2,731 |
|
|
|
|
|
|
|
2,731 |
|
|
|
2,522 |
|
|
|
|
|
|
|
2,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
277,385 |
|
|
|
1,610 |
|
|
|
278,995 |
|
|
|
342,997 |
|
|
|
1,610 |
|
|
|
344,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable on which accrual of interest had been
discontinued(2)(3) |
|
$ |
555,585 |
|
|
$ |
2,295 |
|
|
$ |
557,880 |
|
|
$ |
620,144 |
|
|
$ |
3,640 |
|
|
$ |
623,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes personal, revolving lines of credit and other consumer loans. |
|
(2) |
|
Excludes $2.5 million and $2.7 million in loans held for sale on which accrual of
interest had been discontinued as of June 30, 2011 and December 31, 2010, respectively. |
|
(3) |
|
Excludes $79.1 million and $121.3 million of non-performing FHA/VA guaranteed loans
that, due to the nature of their guarantees, present minimal credit risk to the Company as of
June 30, 2011 and December 31, 2010, respectively. |
18
Dorals aging of past due loan receivables as of June 30, 2011 and December 31, 2010 were as follows:
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
30 to 89 Days |
|
|
90 to 179 Days |
|
|
180 to 240 Days |
|
|
Over 240 Days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 90 Days |
|
|
|
Past Due (1) |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Total Past Due |
|
|
Total Past |
|
|
and Still |
|
(In thousands) |
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
Due |
|
|
Accruing |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (2) |
|
$ |
84,433 |
|
|
$ |
|
|
|
$ |
86,342 |
|
|
$ |
|
|
|
$ |
25,432 |
|
|
$ |
|
|
|
$ |
165,727 |
|
|
$ |
98 |
|
|
$ |
361,934 |
|
|
$ |
98 |
|
|
$ |
362,032 |
|
|
$ |
|
|
Lease financing receivables |
|
|
219 |
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
418 |
|
|
|
|
|
Other consumer |
|
|
804 |
|
|
|
|
|
|
|
2,452 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
3,418 |
|
|
|
|
|
|
|
3,418 |
|
|
|
1,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
85,456 |
|
|
|
|
|
|
|
88,993 |
|
|
|
|
|
|
|
25,523 |
|
|
|
|
|
|
|
165,798 |
|
|
|
98 |
|
|
|
365,770 |
|
|
|
98 |
|
|
|
365,868 |
|
|
|
1,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
35,057 |
|
|
|
|
|
|
|
63,690 |
|
|
|
|
|
|
|
5,789 |
|
|
|
|
|
|
|
97,659 |
|
|
|
|
|
|
|
202,195 |
|
|
|
|
|
|
|
202,195 |
|
|
|
|
|
Construction and land |
|
|
3,235 |
|
|
|
|
|
|
|
4,121 |
|
|
|
|
|
|
|
634 |
|
|
|
|
|
|
|
102,761 |
|
|
|
1,610 |
|
|
|
110,751 |
|
|
|
1,610 |
|
|
|
112,361 |
|
|
|
|
|
Commercial and industrial |
|
|
366 |
|
|
|
|
|
|
|
618 |
|
|
|
|
|
|
|
807 |
|
|
|
|
|
|
|
1,960 |
|
|
|
|
|
|
|
3,751 |
|
|
|
|
|
|
|
3,751 |
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
38,658 |
|
|
|
|
|
|
|
68,429 |
|
|
|
|
|
|
|
7,230 |
|
|
|
|
|
|
|
202,380 |
|
|
|
1,610 |
|
|
|
316,697 |
|
|
|
1,610 |
|
|
|
318,307 |
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans |
|
$ |
124,114 |
|
|
$ |
|
|
|
$ |
157,422 |
|
|
$ |
|
|
|
$ |
32,753 |
|
|
$ |
|
|
|
$ |
368,178 |
|
|
$ |
1,708 |
|
|
$ |
682,467 |
|
|
$ |
1,708 |
|
|
$ |
684,175 |
|
|
$ |
2,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with regulatory guidance, Doral defines 30 days past due as when the
borrower is delinquent two payments. Doral defines 90 days past due based upon the actual
number of days past due. |
|
(2) |
|
As of June 30, 2011 excludes $96.0 million of non-performing FHA/VA guaranteed loans
that due to the nature of their guarantees present minimal credit risk to the Company. |
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
30 to 89 Days |
|
|
90 to 179 Days |
|
|
180 to 240 Days |
|
|
Over 240 Days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 90 Days |
|
|
|
Past Due(1) |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Total Past Due |
|
|
Total Past |
|
|
and Still |
|
(In thousands) |
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
Due |
|
|
Accruing |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage(2) |
|
$ |
68,361 |
|
|
$ |
|
|
|
$ |
55,947 |
|
|
$ |
1,624 |
|
|
$ |
19,379 |
|
|
$ |
|
|
|
$ |
196,181 |
|
|
$ |
409 |
|
|
$ |
339,868 |
|
|
$ |
2,033 |
|
|
$ |
341,901 |
|
|
$ |
|
|
Lease financing receivables |
|
|
234 |
|
|
|
|
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620 |
|
|
|
|
|
|
|
620 |
|
|
|
|
|
Other consumer |
|
|
1,341 |
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
1,745 |
|
|
|
|
|
|
|
1,745 |
|
|
|
1,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
69,936 |
|
|
|
|
|
|
|
56,733 |
|
|
|
1,624 |
|
|
|
19,379 |
|
|
|
|
|
|
|
196,185 |
|
|
|
409 |
|
|
|
342,233 |
|
|
|
2,033 |
|
|
|
344,266 |
|
|
|
1,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
35,202 |
|
|
|
|
|
|
|
65,484 |
|
|
|
|
|
|
|
6,962 |
|
|
|
|
|
|
|
120,231 |
|
|
|
|
|
|
|
227,879 |
|
|
|
|
|
|
|
227,879 |
|
|
|
|
|
Construction and land |
|
|
3,901 |
|
|
|
|
|
|
|
284 |
|
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
1,916 |
|
|
|
1,610 |
|
|
|
6,426 |
|
|
|
1,610 |
|
|
|
8,036 |
|
|
|
560 |
|
Commercial and industrial |
|
|
2,281 |
|
|
|
|
|
|
|
8,135 |
|
|
|
|
|
|
|
395 |
|
|
|
|
|
|
|
138,144 |
|
|
|
|
|
|
|
148,955 |
|
|
|
|
|
|
|
148,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
41,384 |
|
|
|
|
|
|
|
73,903 |
|
|
|
|
|
|
|
7,682 |
|
|
|
|
|
|
|
260,291 |
|
|
|
1,610 |
|
|
|
383,260 |
|
|
|
1,610 |
|
|
|
384,870 |
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans |
|
$ |
111,320 |
|
|
$ |
|
|
|
$ |
130,636 |
|
|
$ |
1,624 |
|
|
$ |
27,061 |
|
|
$ |
|
|
|
$ |
456,476 |
|
|
$ |
2,019 |
|
|
$ |
725,493 |
|
|
$ |
3,643 |
|
|
$ |
729,136 |
|
|
$ |
2,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with regulatory guidance, Doral defines 30 days past due as when the
borrower is delinquent two payments. Doral defines 90 days past due based upon the actual
number of days past due. |
|
(2) |
|
As of December 31, 2010 excludes $160.0 million of total past due FHA/VA guaranteed
loans that due to the nature of their guarantees present minimal credit risk to the Company. |
19
The Company would have recognized additional income had all delinquent loans been accounted for on an accrual basis as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
Six Months Period Ended June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (1)(2) |
|
$ |
5,865 |
|
|
$ |
6,577 |
|
|
$ |
9,484 |
|
|
$ |
10,985 |
|
Other consumer |
|
|
18 |
|
|
|
31 |
|
|
|
18 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
5,883 |
|
|
|
6,608 |
|
|
|
9,502 |
|
|
|
11,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
3,477 |
|
|
|
3,292 |
|
|
|
6,108 |
|
|
|
5,774 |
|
Commercial and industrial |
|
|
254 |
|
|
|
88 |
|
|
|
471 |
|
|
|
116 |
|
Construction and land |
|
|
2,436 |
|
|
|
4,383 |
|
|
|
4,790 |
|
|
|
7,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
6,167 |
|
|
|
7,763 |
|
|
|
11,369 |
|
|
|
13,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
12,050 |
|
|
$ |
14,371 |
|
|
$ |
20,871 |
|
|
$ |
24,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $1.6 million and $3.7 million in additional interest income the
Company would have recognized if FHA/VA non-accrual loans been accounted for on an accrual
status for the quarters ended June 30, 2011 and 2010, respectively. |
|
(2) |
|
Excludes $3.2 million and $5.8 million in additional interest income the
Company would have recognized if FHA/VA non-accrual loans been accounted for on an accrual
status for the six months period ended June 30, 2011 and 2010, respectively. |
Credit Quality
The Companys lending activity is its core function and as such the quality and effectiveness of
the loan origination and credit risk areas are imperative to its long term success. The Company
manages credit risk by maintaining sound underwriting standards, monitoring and evaluating loan
portfolio quality (including trends and collectability) and assessing reserves and loan
concentrations. Critical risk management responsibilities include establishing sound lending
standards, monitoring the quality of the loan portfolio performance, establishing loan rating
systems, assessing reserves and loan concentrations, supervising document control and accounting,
providing necessary training and resources to credit officers, implementing lending policies and
loan documentation procedures, identifying problem loans as early as possible, and instituting
procedures to ensure appropriate actions to comply with laws and regulations.
Credit risk management begins with initial underwriting and continues throughout the borrowers
credit cycle. Managements judgment in conjunction with statistical analysis is used in
underwriting, credit decisions, product pricing, risk appetite and setting credit limits, operating
processes and metrics to limit the risks inherent in the loan portfolio and returns. Tolerance
levels are set to decrease the percentage of approvals as the risk profile of the customer
increases. Statistical models are based on detailed behavioral information from external sources
such as credit bureaus, external credit scores and/or internal historical experience. These models
are an integral part of our credit management process and are used in the assessment of both new
and existing credit decisions, portfolio management strategies, collection practices and in the
determination of the allowance for loan and lease losses. The Company has also established an
internal risk rating system and internal classifications which provide timely identification of
potential deterioration in loan quality attributes in the loan portfolio. In addition, the Company
has independent Loan Review and Internal Audit departments, each of which conduct monitoring and
evaluation of loan portfolio quality, loan administration, and other related activities.
The risks involved in a loan decision are thoroughly analyzed prior to approval. Certain
characteristics are indicators of risk, such as loan amount, purpose, product type, property type,
loan amount in relation to the borrowers previous credit experience and loan to value, cash out of
the transaction, time of occupancy, and others. Many lending risks can be mitigated by requiring
higher levels of borrower equity, risk pricing, additional documentation or collateral or other
compensating factors.
The Company follows the established guidelines and requirements for government insured or
guaranteed loans such as FHA, VA, Rural and Government subsidies, as well as conforming loans sold
to FHLMC and FNMA. The Company also provides conventional loans for borrowers that do not qualify
for a conforming loan. Dorals underwriting policies focus primarily on the borrowers ability to
pay and secondarily on collateral value. The maximum loan to value ratio on conventional first
mortgages generally does not exceed 80%. Loans with higher loan to value ratios may require private
mortgage insurance.
20
Due to the current economic conditions, the Company has limited new lending activities in Puerto
Rico in the construction, commercial and consumer (excluding mortgage) markets. The strategy
adopted by the Company in relation to its loan exposures
is to maintain a strong collection process that will ensure the orderly recovery of all loans by
means of its collection efforts or restructuring of the loan. Lending activities in the United
States increased in 2010 and continues to increase through the second quarter of June 30, 2011 as
management determined that the U.S. market provides sound credit opportunities in select segments
and markets. As of June 30, 2011 gross loans receivable in U.S totaled to $1.2 billion showing an increase of $279.8
million compared to December 31, 2010.
Delinquency is the primary indicator of credit quality the Company uses to monitor the credit
quality of its portfolios, and is the basis for internal risk rating of loans. Refreshed LTVs and
to a lesser extent, FICO scores are also considered in analyzing credit quality. On a daily basis,
Doral monitors the delinquency of its loan portfolios and uses this information to calibrate its
collection, restructuring and foreclosure targets. Portfolios are managed by different teams with
expertise in their assigned tranches. For example, loans are segregated geographically, P.R. vs.
U.S.; by product types (residential mortgage, small commercial, consumer, large commercial and
construction and land loans); and by delinquency process stages, such as less than 90 days past
due, over 90 days past due, loss mitigation, foreclosure and OREO.
For large commercial loans (including commercial real estate, commercial and industrial,
construction and land loan portfolios), the Company uses workout agents, collection specialists,
attorneys and third party service providers to supplement the management of the portfolio,
including the credit quality and loss mitigation alternatives. In the case of residential
construction projects, the workout function is primarily handled by a third party servicer that
monitors the end-to-end process including, but not limited to, completion of construction,
necessary restructuring, pricing, marketing and unit sales. For large commercial and construction
loans the initial risk rating is driven by performance and delinquency. On an ongoing basis, the
risk rating of large credits is managed by the portfolio management and collections function and
reviewed and validated by the loan review function. Due to the current economic environment and
managements perceived increase in risk in the commercial loan portfolio, during the third quarter
of 2010, management individually reviewed for impairment all commercial loans over $50,000 that
were over 90 days past due to better estimate the amount the company expects to receive. Beginning
the fourth quarter of 2010, management individually reviewed all commercial real estate loans over
$500,000 that were over 90 days past due, as well as all new loans classified as substandard during
the quarter. In future periods, and while managements assessment of the inherent credit risk in
the commercial portfolio continues to be high, the Company will continue to evaluate on a quarterly
basis 25% of all commercial loans over 90 days past due and between $50,000 and $500,000 so that in
any one year period it would have individually evaluated for impairment 100% of all substandard
commercial loans between $50,000 and $500,000, as well as all substandard commercial real estate
loans over $500,000 and all substandard commercial and construction loans over $1.0 million. There
is a high level of surveillance and monitoring in place to manage these assets and mitigate any
loss exposure.
As a result of the economic situation in P.R., Doral has created a number of loan modification
programs to help borrowers stay in their homes and operate their businesses which also optimizes
borrower performance and returns to Doral (refer to the discussion on loan modifications and
troubled debt restructurings below for further information on the programs). Residential, other
consumer or commercial loan modifications can result in returning a loan to accrual status when the
criteria for doing so are met, resulting in increasing interest income and cash flows as previously
non-performing loans begin to perform, and decreases in foreclosure and OREO costs by decreasing
the number of foreclosed properties.
21
Detailed below is a table of the recorded investment in loans (including FHA/VA loans and loans
held for sale) by the delinquency buckets the Company uses to monitor the credit quality of its
loans as of June 30, 2011 and December 31, 2010. The aging of the delinquent residential mortgage
portfolio in the table below is a result of the prolonged foreclosure process characteristics in
Puerto Rico and the Companys efforts to help customers stay in their homes through various loss
mitigation programs.
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 89 Days |
|
|
90 to 179 Days |
|
|
180 to 240 Days |
|
|
Over 240 Days |
|
|
|
|
|
|
|
|
|
Current |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Total |
|
|
|
|
(In thousands) |
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
Total |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
3,213,187 |
|
|
$ |
264,959 |
|
|
$ |
92,355 |
|
|
$ |
|
|
|
$ |
98,751 |
|
|
$ |
|
|
|
$ |
32,678 |
|
|
$ |
|
|
|
$ |
243,646 |
|
|
$ |
685 |
|
|
$ |
3,680,617 |
|
|
$ |
265,644 |
|
|
$ |
3,946,261 |
|
Lease financing receivables |
|
|
2,342 |
|
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,762 |
|
|
|
|
|
|
|
2,762 |
|
Other consumer |
|
|
43,069 |
|
|
|
31 |
|
|
|
793 |
|
|
|
|
|
|
|
2,316 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
46,324 |
|
|
|
31 |
|
|
|
46,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
3,258,598 |
|
|
|
264,990 |
|
|
|
93,367 |
|
|
|
|
|
|
|
101,268 |
|
|
|
|
|
|
|
32,764 |
|
|
|
|
|
|
|
243,706 |
|
|
|
685 |
|
|
|
3,729,703 |
|
|
|
265,675 |
|
|
|
3,995,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
406,122 |
|
|
|
68,626 |
|
|
|
35,177 |
|
|
|
|
|
|
|
66,460 |
|
|
|
|
|
|
|
5,821 |
|
|
|
|
|
|
|
97,010 |
|
|
|
|
|
|
|
610,590 |
|
|
|
68,626 |
|
|
|
679,216 |
|
Commercial and industrial |
|
|
48,318 |
|
|
|
874,036 |
|
|
|
371 |
|
|
|
|
|
|
|
613 |
|
|
|
|
|
|
|
803 |
|
|
|
|
|
|
|
1,877 |
|
|
|
|
|
|
|
51,982 |
|
|
|
874,036 |
|
|
|
926,018 |
|
Construction and land |
|
|
199,100 |
|
|
|
78,720 |
|
|
|
3,237 |
|
|
|
|
|
|
|
4,121 |
|
|
|
|
|
|
|
632 |
|
|
|
|
|
|
|
102,500 |
|
|
|
1,610 |
|
|
|
309,590 |
|
|
|
80,330 |
|
|
|
389,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
653,540 |
|
|
|
1,021,382 |
|
|
|
38,785 |
|
|
|
|
|
|
|
71,194 |
|
|
|
|
|
|
|
7,256 |
|
|
|
|
|
|
|
201,387 |
|
|
|
1,610 |
|
|
|
972,162 |
|
|
|
1,022,992 |
|
|
|
1,995,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,912,138 |
|
|
$ |
1,286,372 |
|
|
$ |
132,152 |
|
|
$ |
|
|
|
$ |
172,462 |
|
|
$ |
|
|
|
$ |
40,020 |
|
|
$ |
|
|
|
$ |
445,093 |
|
|
$ |
2,295 |
|
|
$ |
4,701,865 |
|
|
$ |
1,288,667 |
|
|
$ |
5,990,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 89 Days |
|
|
90 to 179 Days |
|
|
180 to 240 Days |
|
|
Over 240 Days |
|
|
|
|
|
|
|
|
|
Current |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Total |
|
|
|
|
(In thousands) |
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
PR |
|
|
US |
|
|
Total |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
3,425,774 |
|
|
$ |
106,608 |
|
|
$ |
78,545 |
|
|
$ |
|
|
|
$ |
72,097 |
|
|
$ |
1,624 |
|
|
$ |
27,651 |
|
|
$ |
38 |
|
|
$ |
326,671 |
|
|
$ |
507 |
|
|
$ |
3,930,738 |
|
|
$ |
108,777 |
|
|
$ |
4,039,515 |
|
Lease financing receivables |
|
|
4,187 |
|
|
|
|
|
|
|
234 |
|
|
|
|
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,807 |
|
|
|
|
|
|
|
4,807 |
|
Other consumer |
|
|
50,616 |
|
|
|
26 |
|
|
|
1,341 |
|
|
|
|
|
|
|
2,225 |
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
54,354 |
|
|
|
26 |
|
|
|
54,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
3,480,577 |
|
|
|
106,634 |
|
|
|
80,120 |
|
|
|
|
|
|
|
74,708 |
|
|
|
1,624 |
|
|
|
27,762 |
|
|
|
38 |
|
|
|
326,732 |
|
|
|
507 |
|
|
|
3,989,899 |
|
|
|
108,803 |
|
|
|
4,098,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
,428,616 |
|
|
|
59,903 |
|
|
|
35,307 |
|
|
|
|
|
|
|
65,690 |
|
|
|
|
|
|
|
6,962 |
|
|
|
|
|
|
|
120,231 |
|
|
|
|
|
|
|
656,806 |
|
|
|
59,903 |
|
|
|
716,709 |
|
Commercial and industrial |
|
|
29,653 |
|
|
|
597,056 |
|
|
|
3,901 |
|
|
|
|
|
|
|
607 |
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
2,118 |
|
|
|
|
|
|
|
36,639 |
|
|
|
597,056 |
|
|
|
633,695 |
|
Construction and land |
|
|
200,943 |
|
|
|
107,225 |
|
|
|
2,281 |
|
|
|
|
|
|
|
8,136 |
|
|
|
|
|
|
|
395 |
|
|
|
|
|
|
|
138,144 |
|
|
|
1,610 |
|
|
|
349,899 |
|
|
|
108,835 |
|
|
|
458,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
659,212 |
|
|
|
764,184 |
|
|
|
41,489 |
|
|
|
|
|
|
|
74,433 |
|
|
|
|
|
|
|
7,717 |
|
|
|
|
|
|
|
260,493 |
|
|
|
1,610 |
|
|
|
1,043,344 |
|
|
|
765,794 |
|
|
|
1,809,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,139,789 |
|
|
$ |
870,818 |
|
|
$ |
121,609 |
|
|
$ |
|
|
|
$ |
149,141 |
|
|
$ |
1,624 |
|
|
$ |
35,479 |
|
|
$ |
38 |
|
|
$ |
587,225 |
|
|
$ |
2,117 |
|
|
$ |
5,033,243 |
|
|
$ |
874,597 |
|
|
$ |
5,907,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan modifications and troubled debt restructurings
Doral has created a number of loan modification programs to help borrowers stay in their homes
which also optimizes borrower performance and returns to Doral. In these cases, the restructure or
loan modification fits the definition of TDR. The programs are designed to provide temporary relief
and, if necessary, longer term financial relief to the consumer loan customer. Dorals consumer
loan loss mitigation program (including consumer loan products and residential mortgage loans),
grants a concession for economic or legal reasons related to the borrowers financial difficulties
that Doral would not otherwise consider. Dorals loss mitigation programs can provide for one or a
combination of the following: movement of unpaid principal and interest to the end of the loan,
extension of the loan term for up to ten years, deferral of principal payments for a period of
time, and reduction of interest rates either permanently (feature discontinued in 2010) or for a
period of up to two years. No programs adopted by Doral provide for the forgiveness of
contractually due principal or interest. Deferred principal and uncollected interest are added to
the end of the loan term at the time of the restructuring and uncollected interest is not
recognized as income until collected or when the loan is paid off. Doral wants to make these
programs available only to those borrowers who have defaulted, or are likely to default,
permanently on their loan and would lose their homes in foreclosure action absent some lender
concession. However, Doral will move borrowers and properties to foreclosure if the Company is not
reasonably assured that the borrower will be able to repay all contractual principal or interest
(which is not forgiven in part or whole in any current program).
22
Regarding the commercial loan loss mitigation programs, the Company adapted the loss mitigation
program for residential mortgages discussed above for the small commercial real estate portfolio
and used similar regulatory and accounting treatment for those loans. For the large commercial real
estate, commercial and industrial and construction and land portfolios, the determination is made
on a loan by loan basis at the time of restructuring as to whether a concession was made for
economic or legal reasons related to the borrowers financial difficulty that Doral would not
otherwise consider. Concessions made for commercial loans could include reductions in interest
rates below market rates, extensions of maturity beyond policy, waiving of borrower covenants, or
other contract changes that would be considered a concession. Doral mitigates loan defaults for its
commercial loan portfolios through its Collections function. The functions objective is to
minimize both early stage delinquencies and losses upon default of commercial assets. The group
utilizes existing collections infrastructure of front-end dialers, doorknockers, work-out agents,
and third-party consultants. In the case of residential construction projects and large commercial
loans, the function utilizes third-party vendors to manage the residential construction projects in
terms of construction, marketing and sales, and restructuring of large commercial loans.
Residential, other consumer or commercial loan modifications can result in returning a loan to
accrual status when the criteria for returning a loan to performing status are met (please refer to
Dorals non-accrual policies previously described). Loan modifications also increase Dorals
interest income by returning a non-performing loan to performing status, and cash flows by
providing for payments to be made by the borrower, and decreases foreclosure and real estate owned
(REO) costs by decreasing the number of foreclosed properties. Doral continues to consider a
modified loan as a non-performing asset for purposes of estimating its allowance for loan and lease
losses until the borrower has made at least six consecutive contractual payments. At such time the
loan will be treated as any other performing loan for purposes of estimating the allowance for loan
and lease losses.
Loan modifications that are considered troubled debt restructurings completed during the quarters
and six month periods ended June 30, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Pre-Modification |
|
|
Post-Modification |
|
|
|
|
|
|
Pre-Modification |
|
|
Post-Modification |
|
|
|
|
|
|
|
Outstanding Recorded |
|
|
Outstanding Recorded |
|
|
|
|
|
|
Outstanding Recorded |
|
|
Outstanding Recorded |
|
(In thousands) |
|
Number of Contracts |
|
|
Investment |
|
|
Investment |
|
|
Number of Contracts |
|
|
Investment |
|
|
Investment |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non FHA/VA Residential |
|
|
320 |
|
|
$ |
37,000 |
|
|
$ |
36,548 |
|
|
|
526 |
|
|
$ |
64,062 |
|
|
$ |
63,733 |
|
Other Consumer |
|
|
8 |
|
|
|
46 |
|
|
|
46 |
|
|
|
23 |
|
|
|
143 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer |
|
|
328 |
|
|
|
37,046 |
|
|
|
36,594 |
|
|
|
549 |
|
|
|
64,205 |
|
|
|
63,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate |
|
|
10 |
|
|
$ |
3,309 |
|
|
$ |
3,671 |
|
|
|
8 |
|
|
$ |
1,690 |
|
|
$ |
1,690 |
|
Commercial and Industrial |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
5,226 |
|
|
|
5,226 |
|
Construction and Land |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
14,018 |
|
|
|
14,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
|
10 |
|
|
|
3,309 |
|
|
|
3,671 |
|
|
|
14 |
|
|
|
20,934 |
|
|
|
20,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan Modifications |
|
|
338 |
|
|
$ |
40,355 |
|
|
$ |
40,265 |
|
|
|
563 |
|
|
$ |
85,139 |
|
|
$ |
84,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Pre-modification |
|
|
Post-modification |
|
|
|
|
|
|
Pre-modification |
|
|
Post-modification |
|
|
|
Number of |
|
|
recorded |
|
|
recorded |
|
|
Number of |
|
|
recorded |
|
|
recorded |
|
(In thousands) |
|
contracts |
|
|
investment |
|
|
investment |
|
|
contracts |
|
|
investment |
|
|
investment |
|
Consumer modifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential non FHA/VA |
|
|
1,130 |
|
|
$ |
129,277 |
|
|
$ |
127,318 |
|
|
|
712 |
|
|
$ |
85,881 |
|
|
$ |
85,643 |
|
Other consumer |
|
|
18 |
|
|
|
109 |
|
|
|
109 |
|
|
|
36 |
|
|
|
297 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
1,148 |
|
|
|
129,386 |
|
|
|
127,427 |
|
|
|
748 |
|
|
|
86,178 |
|
|
|
85,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
80 |
|
|
$ |
18,937 |
|
|
$ |
18,912 |
|
|
|
17 |
|
|
$ |
8,581 |
|
|
$ |
8,581 |
|
Commercial and industrial |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
9,489 |
|
|
|
9,489 |
|
Construction and land |
|
|
2 |
|
|
|
61 |
|
|
|
60 |
|
|
|
5 |
|
|
|
17,185 |
|
|
|
17,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
82 |
|
|
|
18,998 |
|
|
|
18,972 |
|
|
|
26 |
|
|
|
35,255 |
|
|
|
35,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan modifications |
|
|
1,230 |
|
|
$ |
148,384 |
|
|
$ |
146,399 |
|
|
|
774 |
|
|
$ |
121,433 |
|
|
$ |
121,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results
in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than
do defaults on new origination loans, so modified loans present a higher risk of loss than do new
origination loans.
Loan modifications considered troubled debt restructurings made during the twelve months previous
to June 30, 2011, that defaulted during the six month period ending June 30, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six month period ended June 30, 2011 |
|
(In thousands) |
|
Number
of contracts |
|
|
Recorded investment |
|
Consumer |
|
|
|
|
|
|
|
|
Residential mortgage non FHA/VA |
|
|
681 |
|
|
$ |
83,689 |
|
Other consumer |
|
|
8 |
|
|
|
74 |
|
|
|
|
|
|
|
|
Total consumer |
|
|
689 |
|
|
|
83,763 |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
105 |
|
|
|
23,800 |
|
Construction and land |
|
|
5 |
|
|
|
6,824 |
|
|
|
|
|
|
|
|
Total commercial |
|
|
110 |
|
|
|
30,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recidivism |
|
|
799 |
|
|
$ |
114,387 |
|
|
|
|
|
|
|
|
For the quarter and six month periods ended June 30, 2011, the Company would have recognized
$2.5 million and $4.0 million, respectively, in additional interest income had all TDR loans been
accounted for on an accrual basis.
As of June 30, 2011, construction TDRs include an outstanding principal balance of $77.5 million
with commitments to disburse additional funds of $19.1 million.
10. Allowance for Loan and Lease Losses and Impaired Loans
Dorals allowance for loan and lease losses (ALLL) is managements estimate of credit losses
inherent in the reported loan receivable balance as of the financial statement date. Management
estimates the ALLL separately for each product category (non-FHA/VA residential mortgage loans,
other consumer, commercial real estate, construction and land, and other commercial and industrial)
and geography (Puerto Rico and U.S. mainland), and combines the amounts in reaching its estimate
for the full portfolio.
24
Managements product category loss reserve estimate for performing loans considers: (i) the reserve
is estimated based upon the probability of the performing loan defaulting at some future period,
and (ii) Dorals historical experience of charge-offs related to the outstanding principal balance.
For non-performing loans, the reserve is estimated either by (i) considering the loans current
level of delinquency and the probability that the loan will be foreclosed upon from that
delinquency stage, and the loss that will be realized assuming foreclosure (mortgage loans), or
(ii) measuring impairment for individual loans considering the specific facts and circumstances of
the borrower, guarantors, collateral, legal matters, market matters, and other circumstances that
may affect the borrowers ability to repay their loan, Dorals ability to repossess and liquidate
the collateral, and Dorals ability to pursue and enforce any deficiency in payment received. The
probability of a loan migrating to foreclosure whether a current loan or a past due loan, and the
amount of loss given default, is based upon the Companys own experience, with more recent
experience judgmentally weighted more heavily in the calculated factors. With this practice
management believes the factors used better represent existing economic conditions. In estimating
the loss given default factor, management uses rates that are unique to ranges of loan-to-value
ratios (calculated as current loan balance divided by the most recent appraisal value).
Loans determined to be TDRs are impaired and for purpose of estimating the ALLL must be
individually evaluated for impairment. For residential mortgage loans determined to be TDRs, on a
monthly basis, the Company pools TDRs with similar characteristics and performs an impairment
analysis of discounted cash flows. If a pool yields a present value below the recorded investment
in the pool of loans, an impairment is recognized by a charge to the provision for loan and lease
losses and a credit to the ALLL. For loss mitigated loans without a concession in the interest
rate, the Company performs an impairment analysis of discounted cash flows giving consideration of
probability of default and loss given foreclosure on those estimated cash flows, and records an
impairment by charging the provision for loan and lease losses with a corresponding credit to the
ALLL.
The activity in Dorals allowance for loan and lease losses account for the quarters and six month
periods ending June 30, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2011 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
and |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
Land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
54,016 |
|
|
|
5,565 |
|
|
$ |
59,581 |
|
|
$ |
23,956 |
|
|
$ |
30,642 |
|
|
$ |
6,025 |
|
|
$ |
60,623 |
|
|
$ |
120,204 |
|
Provision for loan and lease losses |
|
|
5,410 |
|
|
|
854 |
|
|
|
6,264 |
|
|
|
4,372 |
|
|
|
2,278 |
|
|
|
409 |
|
|
|
7,059 |
|
|
|
13,323 |
|
Losses charged to the allowance |
|
|
(4,271 |
) |
|
|
(1,239 |
) |
|
|
(5,510 |
) |
|
|
(12,755 |
) |
|
|
(21,769 |
) |
|
|
(407 |
) |
|
|
(34,931 |
) |
|
|
(40,441 |
) |
Recoveries |
|
|
|
|
|
|
367 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
55,155 |
|
|
$ |
5,547 |
|
|
$ |
60,702 |
|
|
$ |
15,573 |
|
|
$ |
11,151 |
|
|
$ |
6,046 |
|
|
$ |
32,770 |
|
|
$ |
93,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans (1) |
|
$ |
3,537,904 |
|
|
$ |
46,947 |
|
|
$ |
3,584,851 |
|
|
$ |
666,580 |
|
|
$ |
389,920 |
|
|
$ |
912,420 |
|
|
$ |
1,968,920 |
|
|
$ |
5,553,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL for loans individually evaluated for impairment |
|
$ |
26,963 |
|
|
$ |
|
|
|
$ |
26,963 |
|
|
$ |
9,071 |
|
|
$ |
3,275 |
|
|
$ |
342 |
|
|
$ |
12,688 |
|
|
$ |
39,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans individually evaluated for impairment |
|
$ |
792,005 |
|
|
$ |
|
|
|
$ |
792,005 |
|
|
$ |
252,166 |
|
|
$ |
154,505 |
|
|
$ |
11,708 |
|
|
$ |
418,379 |
|
|
$ |
1,210,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL of loans collectively evaluated for impairment |
|
$ |
28,192 |
|
|
$ |
5,547 |
|
|
$ |
33,739 |
|
|
$ |
6,502 |
|
|
$ |
7,876 |
|
|
$ |
5,704 |
|
|
$ |
20,082 |
|
|
$ |
53,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans collectively evaluated for impairment |
|
$ |
2,745,899 |
|
|
$ |
46,947 |
|
|
$ |
2,792,846 |
|
|
$ |
414,414 |
|
|
$ |
235,415 |
|
|
$ |
900,712 |
|
|
$ |
1,550,541 |
|
|
$ |
4,343,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes reported balance of guaranteed loans and loans on savings deposits. |
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2010 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
and |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
Land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
53,708 |
|
|
$ |
7,763 |
|
|
$ |
61,471 |
|
|
$ |
24,745 |
|
|
$ |
57,233 |
|
|
$ |
4,032 |
|
|
$ |
86,010 |
|
|
$ |
147,481 |
|
Provision for loan and lease losses |
|
|
18,769 |
|
|
|
1,644 |
|
|
|
20,413 |
|
|
|
4,771 |
|
|
|
17,705 |
|
|
|
1,728 |
|
|
|
24,204 |
|
|
|
44,617 |
|
Losses charged to the allowance |
|
|
(14,497 |
) |
|
|
(2,106 |
) |
|
|
(16,603 |
) |
|
|
(430 |
) |
|
|
(39,489 |
) |
|
|
(978 |
) |
|
|
(40,897 |
) |
|
|
(57,500 |
) |
Recoveries |
|
|
|
|
|
|
272 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
43 |
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
57,980 |
|
|
$ |
7,573 |
|
|
$ |
65,553 |
|
|
$ |
29,086 |
|
|
$ |
35,449 |
|
|
$ |
4,825 |
|
|
$ |
69,360 |
|
|
$ |
134,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans (1) |
|
$ |
3,674,920 |
|
|
$ |
70,119 |
|
|
$ |
3,745,039 |
|
|
$ |
728,608 |
|
|
$ |
382,572 |
|
|
$ |
475,061 |
|
|
$ |
1,586,241 |
|
|
$ |
5,331,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL for loans individually evaluated for impairment |
|
$ |
9,074 |
|
|
$ |
|
|
|
$ |
9,074 |
|
|
$ |
14,303 |
|
|
$ |
29,256 |
|
|
$ |
243 |
|
|
$ |
43,802 |
|
|
$ |
52,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans individually evaluated for impairment |
|
$ |
250,028 |
|
|
$ |
|
|
|
$ |
250,028 |
|
|
$ |
146,469 |
|
|
$ |
211,972 |
|
|
$ |
244 |
|
|
$ |
358,685 |
|
|
$ |
608,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL of loans collectively evaluated for impairment |
|
$ |
48,906 |
|
|
$ |
7,573 |
|
|
$ |
56,479 |
|
|
$ |
14,783 |
|
|
$ |
6,193 |
|
|
$ |
4,582 |
|
|
$ |
25,558 |
|
|
$ |
82,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans collectively evaluated for impairment |
|
$ |
3,424,892 |
|
|
$ |
70,119 |
|
|
$ |
3,495,011 |
|
|
$ |
582,139 |
|
|
$ |
170,600 |
|
|
$ |
474,817 |
|
|
$ |
1,227,556 |
|
|
$ |
4,722,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Excludes reported balance of guaranteed loans and loans on savings deposits. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended June 30, 2011 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
and |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
Land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
56,487 |
|
|
$ |
6,274 |
|
|
$ |
62,761 |
|
|
$ |
29,712 |
|
|
$ |
25,026 |
|
|
$ |
6,153 |
|
|
$ |
60,891 |
|
|
$ |
123,652 |
|
Provision for loan and lease losses |
|
|
6,165 |
|
|
|
1,349 |
|
|
|
7,514 |
|
|
|
(1,384 |
) |
|
|
9,484 |
|
|
|
300 |
|
|
|
8,400 |
|
|
|
15,914 |
|
Losses charged to the allowance |
|
|
(7,497 |
) |
|
|
(2,837 |
) |
|
|
(10,334 |
) |
|
|
(12,755 |
) |
|
|
(23,359 |
) |
|
|
(426 |
) |
|
|
(36,540 |
) |
|
|
(46,874 |
) |
Recoveries |
|
|
|
|
|
|
761 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
55,155 |
|
|
$ |
5,547 |
|
|
$ |
60,702 |
|
|
$ |
15,573 |
|
|
$ |
11,151 |
|
|
$ |
6,046 |
|
|
$ |
32,770 |
|
|
$ |
93,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans (1) |
|
$ |
3,537,904 |
|
|
$ |
46,947 |
|
|
$ |
3,584,851 |
|
|
$ |
666,580 |
|
|
$ |
389,920 |
|
|
$ |
912,420 |
|
|
$ |
1,968,920 |
|
|
$ |
5,553,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL for loans individually evaluated for impairment |
|
$ |
26,963 |
|
|
$ |
|
|
|
$ |
26,963 |
|
|
$ |
9,071 |
|
|
$ |
3,275 |
|
|
$ |
342 |
|
|
$ |
12,688 |
|
|
$ |
39,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans individually evaluated for impairment |
|
$ |
792,005 |
|
|
$ |
|
|
|
$ |
792,005 |
|
|
$ |
252,166 |
|
|
$ |
154,505 |
|
|
$ |
11,708 |
|
|
$ |
418,379 |
|
|
$ |
1,210,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL of loans collectively evaluated for impairment |
|
$ |
28,192 |
|
|
$ |
5,547 |
|
|
$ |
33,739 |
|
|
$ |
6,502 |
|
|
$ |
7,876 |
|
|
$ |
5,704 |
|
|
$ |
20,082 |
|
|
$ |
53,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans collectively evaluated for impairment |
|
$ |
2,745,899 |
|
|
$ |
46,947 |
|
|
$ |
2,792,846 |
|
|
$ |
414,414 |
|
|
$ |
235,415 |
|
|
$ |
900,712 |
|
|
$ |
1,550,541 |
|
|
$ |
4,343,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes reported balance of guaranteed loans and loans on savings deposits. |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended June 30, 2010 |
|
|
|
Non-FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
Construction |
|
|
Commercial |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consume |
|
|
Consumer |
|
|
Real Estate |
|
|
Land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
51,814 |
|
|
$ |
8,338 |
|
|
$ |
60,152 |
|
|
$ |
21,883 |
|
|
$ |
54,458 |
|
|
$ |
4,281 |
|
|
$ |
80,622 |
|
|
$ |
140,774 |
|
Provision for loan and lease losses |
|
|
25,378 |
|
|
|
3,277 |
|
|
|
28,655 |
|
|
|
7,839 |
|
|
|
20,390 |
|
|
|
1,654 |
|
|
|
29,883 |
|
|
|
58,538 |
|
Losses charged to the allowance |
|
|
(19,212 |
) |
|
|
(4,555 |
) |
|
|
(23,767 |
) |
|
|
(686 |
) |
|
|
(39,521 |
) |
|
|
(1,176 |
) |
|
|
(41,383 |
) |
|
|
(65,150 |
) |
Recoveries |
|
|
|
|
|
|
513 |
|
|
|
513 |
|
|
|
50 |
|
|
|
122 |
|
|
|
66 |
|
|
|
238 |
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
57,980 |
|
|
$ |
7,573 |
|
|
$ |
65,553 |
|
|
$ |
29,086 |
|
|
$ |
35,449 |
|
|
$ |
4,825 |
|
|
$ |
69,360 |
|
|
$ |
134,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans (1) |
|
$ |
3,674,920 |
|
|
$ |
70,119 |
|
|
$ |
3,745,039 |
|
|
$ |
728,608 |
|
|
$ |
382,572 |
|
|
$ |
475,061 |
|
|
$ |
1,586,241 |
|
|
$ |
5,331,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL for loans individually evaluated for
impairment |
|
$ |
9,074 |
|
|
$ |
|
|
|
$ |
9,074 |
|
|
$ |
14,303 |
|
|
$ |
29,256 |
|
|
$ |
243 |
|
|
$ |
43,802 |
|
|
$ |
52,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans individually
evaluated for impairment |
|
$ |
250,028 |
|
|
$ |
|
|
|
$ |
250,028 |
|
|
$ |
146,469 |
|
|
$ |
211,972 |
|
|
$ |
244 |
|
|
$ |
358,685 |
|
|
$ |
608,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL of loans collectively evaluated for
impairment |
|
$ |
48,906 |
|
|
$ |
7,573 |
|
|
$ |
56,479 |
|
|
$ |
14,783 |
|
|
$ |
6,193 |
|
|
$ |
4,582 |
|
|
$ |
25,558 |
|
|
$ |
82,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans collectively
evaluated for impairment |
|
$ |
3,424,892 |
|
|
$ |
70,119 |
|
|
$ |
3,495,011 |
|
|
$ |
582,139 |
|
|
$ |
170,600 |
|
|
$ |
474,817 |
|
|
$ |
1,227,556 |
|
|
$ |
4,722,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes reported balance of guaranteed loans and loans on savings deposits. |
27
The following table provides Dorals recorded investment in impaired loans which reflects
partial charge-offs and other amounts which reduce credit risk, the contractual unpaid principal
balance (UPB), and the related allowance as of
June 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Recorded |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
Related |
|
|
|
|
(In thousands) |
|
UPB |
|
|
Investment |
|
|
Allowance |
|
|
Reserve % |
|
|
UPB |
|
|
Investment |
|
|
Allowance |
|
|
Reserve %(1) |
|
With no allowance recorded at the report date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential(2) |
|
$ |
299,817 |
|
|
$ |
277,954 |
|
|
$ |
|
|
|
|
|
% |
|
$ |
267,767 |
|
|
$ |
264,785 |
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
299,817 |
|
|
|
277,954 |
|
|
|
|
|
|
|
|
% |
|
|
267,767 |
|
|
|
264,785 |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
165,751 |
|
|
|
148,754 |
|
|
|
|
|
|
|
|
% |
|
|
145,099 |
|
|
|
131,078 |
|
|
|
|
|
|
|
|
% |
Commercial and industrial |
|
|
10,890 |
|
|
|
10,822 |
|
|
|
|
|
|
|
|
% |
|
|
5,489 |
|
|
|
5,435 |
|
|
|
|
|
|
|
|
% |
Construction and land |
|
|
107,945 |
|
|
|
107,535 |
|
|
|
|
|
|
|
|
% |
|
|
96,357 |
|
|
|
85,252 |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
284,586 |
|
|
|
267,111 |
|
|
|
|
|
|
|
|
% |
|
|
246,945 |
|
|
|
221,765 |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance recorded at the report date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential(2) |
|
|
529,184 |
|
|
|
514,051 |
|
|
|
26,963 |
|
|
|
5.25 |
% |
|
|
537,698 |
|
|
|
533,223 |
|
|
|
27,347 |
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
529,184 |
|
|
|
514,051 |
|
|
|
26,963 |
|
|
|
5.25 |
% |
|
|
537,698 |
|
|
|
533,223 |
|
|
|
27,347 |
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
119,149 |
|
|
|
103,412 |
|
|
|
9,071 |
|
|
|
8.77 |
% |
|
|
138,827 |
|
|
|
131,941 |
|
|
|
22,086 |
|
|
|
16.74 |
% |
Commercial and industrial |
|
|
1,031 |
|
|
|
887 |
|
|
|
342 |
|
|
|
6.97 |
% |
|
|
2,069 |
|
|
|
2,070 |
|
|
|
1,060 |
|
|
|
51.21 |
% |
Construction and land |
|
|
47,085 |
|
|
|
46,970 |
|
|
|
3,275 |
|
|
|
38.56 |
% |
|
|
118,966 |
|
|
|
105,872 |
|
|
|
18,200 |
|
|
|
17.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
167,265 |
|
|
|
151,269 |
|
|
|
12,688 |
|
|
|
8.39 |
% |
|
|
259,862 |
|
|
|
239,883 |
|
|
|
41,346 |
|
|
|
17.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential(2) |
|
|
829,001 |
|
|
|
792,005 |
|
|
|
26,963 |
|
|
|
3.40 |
% |
|
|
805,465 |
|
|
|
798,008 |
|
|
|
27,347 |
|
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
829,001 |
|
|
|
792,005 |
|
|
|
26,963 |
|
|
|
3.40 |
% |
|
|
805,465 |
|
|
|
798,008 |
|
|
|
27,347 |
|
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
284,900 |
|
|
|
252,166 |
|
|
|
9,071 |
|
|
|
3.60 |
% |
|
|
283,926 |
|
|
|
263,019 |
|
|
|
22,086 |
|
|
|
8.40 |
% |
Commercial and industrial |
|
|
11,921 |
|
|
|
11,709 |
|
|
|
3,275 |
|
|
|
2.12 |
% |
|
|
7,558 |
|
|
|
7,505 |
|
|
|
1,060 |
|
|
|
14.12 |
% |
Construction and land |
|
|
155,030 |
|
|
|
154,505 |
|
|
|
342 |
|
|
|
2.92 |
% |
|
|
215,323 |
|
|
|
191,124 |
|
|
|
18,200 |
|
|
|
9.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
451,851 |
|
|
|
418,380 |
|
|
|
12,688 |
|
|
|
3.03 |
% |
|
|
506,807 |
|
|
|
461,648 |
|
|
|
41,346 |
|
|
|
8.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,280,852 |
|
|
$ |
1,210,385 |
|
|
$ |
39,651 |
|
|
|
3.28 |
% |
|
$ |
1,312,272 |
|
|
$ |
1,259,656 |
|
|
$ |
68,693 |
|
|
|
5.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross reserve percent represents the amount of the allowance to the recorded
investment. |
|
(2) |
|
As of December 31, 2010 includes UPB and recorded investment
of $66.0 million and $65.7 million,
respectively of TDRs not previously included as impaired loans. |
28
The second quarter ended June 30, 2011 included approximately $30.1 million of
charge-offs as a result of adopting the practice of charging-off the portion of the difference
between the loan balance before charge-off and the estimated fair value of the property
collateralizing the loan prior to receipt of a third party appraisal due to the long delays to
receive such appraisals in Dorals Puerto Rico market. This new practice accelerated charge-offs
into the 2011 second quarter, reduced the allowance for loan losses balance, and reduced the loan
receivable balance.
The following table provides Dorals average recorded investment in impaired loans and the related
interest income recognized during the time within that period that the loans were impaired for the
quarters and six month periods ended June 30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Recorded |
|
|
Interest Income |
|
|
Recorded |
|
|
Interest Income |
|
(In thousands) |
|
Investment |
|
|
Recognized |
|
|
Investment |
|
|
Recognized |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential |
|
$ |
609,598 |
|
|
$ |
6,015 |
|
|
$ |
536,076 |
|
|
$ |
6,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
609,598 |
|
|
|
6,015 |
|
|
|
536,076 |
|
|
|
6,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
241,285 |
|
|
|
1,241 |
|
|
|
156,604 |
|
|
|
647 |
|
Commercial and industrial |
|
|
9,264 |
|
|
|
172 |
|
|
|
247 |
|
|
|
5 |
|
Construction and land |
|
|
164,799 |
|
|
|
763 |
|
|
|
269,624 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
415,348 |
|
|
|
2,176 |
|
|
|
426,475 |
|
|
|
999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,024,946 |
|
|
$ |
8,191 |
|
|
$ |
962,551 |
|
|
$ |
7,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six month period Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Recorded |
|
|
Interest Income |
|
|
Recorded |
|
|
Interest Income |
|
(In thousands) |
|
Investment |
|
|
Recognized |
|
|
Investment |
|
|
Recognized |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential |
|
$ |
626,380 |
|
|
$ |
12,029 |
|
|
$ |
485,222 |
|
|
$ |
13,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
626,380 |
|
|
|
12,029 |
|
|
|
485,222 |
|
|
|
13,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
243,676 |
|
|
|
2,482 |
|
|
|
153,247 |
|
|
|
1,297 |
|
Commercial and industrial |
|
|
9,606 |
|
|
|
344 |
|
|
|
250 |
|
|
|
10 |
|
Construction and land |
|
|
172,351 |
|
|
|
1,526 |
|
|
|
270,389 |
|
|
|
693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
425,633 |
|
|
|
4,352 |
|
|
|
423,886 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,052,013 |
|
|
$ |
16,381 |
|
|
$ |
909,108 |
|
|
$ |
15,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For TDRs where impairment is measured based on the present value of expected future cash
flows, the entire change in present value is recognized as a provision for loan and lease losses,
therefore, interest income in the table above does not include any interest based on the change in
present value attributable to the passage of time.
29
11. Related Party Transactions
The following table summarizes certain information regarding Doral Financials loans outstanding to
officers, directors and common stockholders controlling 5% or more for the periods indicated.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Balance at beginning of period |
|
$ |
1,300 |
|
|
$ |
2,840 |
|
Repayments |
|
|
(20 |
) |
|
|
(96 |
) |
Loans of former officers |
|
|
(29 |
) |
|
|
(1,444 |
) |
|
|
|
|
|
|
|
Balance at end of period(1) |
|
$ |
1,251 |
|
|
$ |
1,300 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At June 30, 2011 and December 31, 2010, none of the loans outstanding to officers,
directors and 5% or more stockholders were delinquent. |
At both June 30, 2011 and December 31, 2010, the amount of loans outstanding to officers,
directors and 5% or more stockholders secured by mortgages on real estate totalled to $1.2 million.
Since 2000, Doral Financial has conducted business with an entity that provides property inspection
services and is co-owned by the spouse of a former Executive Vice President of the Company
(employed through the third quarter of 2010). The amount paid by the Company to this entity for the
quarter and six month period ended June 30, 2010 totalled to $0.6 million and $1.2 million,
respectively. No amounts were paid to this entity during 2011.
For both the quarter and six month periods ended June 30, 2010, the Company assumed approximately
$0.5 million, of the professional services expense related to Doral Holdings. Doral Holdings was
dissolved on December 15, 2010 and no fees have been paid during 2011.
12. Accounts Receivable and Other Assets
The Company reported accounts receivable of $41.6 million and $28.7 million as of June 30, 2011 and
December 31, 2010, respectively. Total accounts receivable included $15.2 million and $12.5 million
related to claims of loans foreclosed to FHA and VA as of June 30, 2011 and December 31, 2010,
respectively.
13. Servicing Activities
The Company routinely originates, securitizes and sells mortgage loans into the secondary market.
The Company generally retains the servicing rights and, in the past, also retained IOs. Mortgage
Servicing Rights (MSR) represent the estimated present value of the normal servicing fees (net of
related servicing costs) expected to be received on a loan being serviced over the expected term of
the loan. MSRs entitle Doral Financial to a future stream of cash flows based on the outstanding
principal balance of the loans serviced and the contractual servicing fee. The annual servicing
fees generally range between 25 and 50 basis points, less, in certain cases, any corresponding
guarantee fee. In addition, MSRs may entitle Doral Financial, depending on the contract language,
to ancillary income including late charges, float income, and prepayment penalties net of the
appropriate expenses incurred for performing the servicing functions. In certain instances, the
Company also services loans with no contractual servicing fee. The servicing asset or liability
associated with such loans is evaluated based on ancillary income, including float, late fees,
prepayment penalties and costs.
30
The changes in servicing assets measured using the fair value method for the quarters and six month
periods ended June 30, 2011 and 2010 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
116,299 |
|
|
$ |
118,236 |
|
|
$ |
114,342 |
|
|
$ |
118,493 |
|
Capitalization of servicing assets |
|
|
2,546 |
|
|
|
1,407 |
|
|
|
4,642 |
|
|
|
3,184 |
|
Sales of servicing asset(1) |
|
|
|
|
|
|
(162 |
) |
|
|
|
|
|
|
(192 |
) |
Servicing release due to repurchase(2) |
|
|
(417 |
) |
|
|
(1,029 |
) |
|
|
(505 |
) |
|
|
(1,165 |
) |
Change in fair value |
|
|
(2,643 |
) |
|
|
(5,447 |
) |
|
|
(2,694 |
) |
|
|
(7,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period(3) |
|
$ |
115,785 |
|
|
$ |
113,005 |
|
|
$ |
115,785 |
|
|
$ |
113,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents MSRs sales related to $22.5 million and $24.0 million in principal
balance of mortgage loans for the quarter and six month period ended 2010. |
|
(2) |
|
Amount represents the adjustment of MSR fair value related to the repurchase of
$28.8 million and $74.5 million in principal balance of mortgage loans serviced for others for
the quarters ended June 30, 2011 and 2010, and $35.1 million and $84.6 million for the six
month periods ended June 30, 2011 and 2010, respectively. |
|
(3) |
|
Outstanding balance of loans serviced for third parties totalled to $8.0 billion and
$8.3 billion as of June 30, 2011 and 2010, respectively, which includes $2.5 million and $2.8
million, respectively, of loans being serviced under sub-servicing arrangements. |
The Company recognizes as assets the rights to service loans for others and records these
assets at fair value. The fair value of the Companys MSRs is determined based on a combination of
market information on trading activity (servicing asset trades and broker valuations), benchmarking
of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Companys
servicing assets incorporates two sets of assumptions: (i) market derived assumptions for discount
rates, servicing costs, escrow earnings rate, float earnings rate and cost of funds and (ii) market
derived assumptions adjusted for the Companys loan characteristics and portfolio behavior for
escrow balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties.
The constant prepayment rate (CPR) assumptions employed for the valuation of the Companys
servicing assets for the quarter ended June 30, 2011 was 7.3% compared to 9.3% for the
corresponding 2010 period.
Discount rate assumptions for the Companys servicing assets were stable for the quarters ended
June 30, 2011 and 2010, which was 11.3% for both periods.
Based on recent prepayment experience, the expected weighted-average remaining life of the
Companys servicing assets at June 30, 2011 and 2010 was 7.3 years and 6.5 years, respectively. Any
projection of the expected weighted-average remaining life of servicing assets is limited by
conditions that existed at the time the calculations were performed.
At June 30, 2011 and December 31, 2010, fair values of the Companys retained interest were based
on internal models that incorporate market driven assumptions, such as discount rates, prepayment
speeds and implied forward London Interbank Offered Rate (LIBOR) rates (in the case of variable
IOs), adjusted by the particular characteristics of the Companys servicing portfolio.
The weighted-averages of the key economic assumptions used by the Company in its internal models
and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20
percent adverse changes in those assumptions for mortgage loans at June 30, 2011, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Only |
(Dollars in thousands) |
|
Servicing Assets |
|
Strips |
Carrying amount of retained interest |
|
$ |
115,785 |
|
|
$ |
43,750 |
|
Weighted-average expected life (in years) |
|
|
7.3 |
|
|
|
5.8 |
|
Constant prepayment rate (weighted-average annual rate) |
|
|
7.3 |
% |
|
|
7.5 |
% |
Decrease in fair value due to 10% adverse change |
|
$ |
(3,642 |
) |
|
$ |
(1,013 |
) |
Decrease in fair value due to 20% adverse change |
|
$ |
(7,115 |
) |
|
$ |
(1,988 |
) |
Residual cash flow discount rate (weighted-average annual rate) |
|
|
11.3 |
% |
|
|
13.0 |
% |
Decrease in fair value due to 10% adverse change |
|
$ |
(4,833 |
) |
|
$ |
(1,496 |
) |
Decrease in fair value due to 20% adverse change |
|
$ |
(9,301 |
) |
|
$ |
(2,890 |
) |
31
These sensitivities are hypothetical and should be used with caution. As the figures indicate,
changes in fair value based on a 10 percent variation in assumptions generally cannot be
extrapolated because the relationship of the change in assumption to the change in fair value may
not be linear. Also, in this table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any other assumption. In
reality, changes in one factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments), which may magnify or offset the sensitivities.
To determine the value of its portfolio of variable IOs, Doral Financial uses an internal valuation
model that forecasts expected cash flows using forward LIBOR rates derived from the LIBOR/Swap
yield curve at the date of the valuation. The characteristics of the variable IOs result in an
increase in cash flows when LIBOR rates fall and a reduction in cash flows when LIBOR rates rise.
This provides a mitigating effect on the impact of prepayment speeds on the cash flows, with
prepayment expected to rise when long-term interest rates fall reducing the amount of expected cash
flows and the opposite when long-term interest rates rise. Prepayment assumptions incorporated into
the valuation model for variable and fixed IOs are based on publicly available, independently
verifiable, prepayment assumptions for FNMA mortgage pools and statistically derived prepayment
adjusters based on observed relationships between the Companys and the FNMAs U.S. mainland
mortgage pool prepayment experiences.
This methodology resulted in a CPR of 7.5% and 11.1% for the quarters ended June 30, 2011 and 2010,
respectively. The change in the CPR between 2011 and 2010 was due mostly to a generalized decrease
in market interest rates.
The
Company continued to benchmark its internal assumptions for setting
its discount rate to a third party valuation provider. This methodology resulted in a discount rate of
13.0% for both quarters ended June 30, 2011 and 2010.
For IOs, Doral Financial recognizes as interest income (through the life of the IO) the excess of
all estimated cash flows attributable to these interests over their recorded balance using the
effective yield method. Doral Financial recognizes as interest income the excess of the cash
collected from the borrowers over the yield payable to investors, less a servicing fee (retained
spread), up to an amount equal to the yield on the IOs. Doral Financial accounts for any excess
retained spread as amortization to the gross IO capitalized at inception. The Company updates its
estimates of expected cash flows periodically and recognizes changes in calculated effective
yield on a prospective basis.
The activity of interest-only strips is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
41,618 |
|
|
$ |
43,584 |
|
|
$ |
44,250 |
|
|
$ |
45,723 |
|
Amortization |
|
|
(1,947 |
) |
|
|
(2,729 |
) |
|
|
(4,128 |
) |
|
|
(5,527 |
) |
Gain on the IO value |
|
|
4,079 |
|
|
|
3,857 |
|
|
|
3,628 |
|
|
|
4,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
43,750 |
|
|
$ |
44,712 |
|
|
$ |
43,750 |
|
|
$ |
44,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the estimated change in the fair value of the Companys IOs,
the constant prepayment rate and the weighted-average expected life under the Companys valuation
model, given several hypothetical (instantaneous and parallel) increases or decreases in interest
rates. As of June 30, 2011, all of the mortgage loan sales contracts underlying the Companys
floating rate IOs were subject to interest rate caps.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Rates |
|
Constant |
|
Weighted-Average |
|
Change in Fair |
|
Percentage |
|
|
(Basis Points) |
|
Prepayment Rate |
|
Expected Life (Years) |
|
Value of IOs |
|
of Change |
|
|
|
200 |
|
|
|
5.3 |
% |
|
|
6.8 |
|
|
$ |
(6,154 |
) |
|
|
(14.1) |
% |
|
|
|
100 |
|
|
|
6.3 |
% |
|
|
6.3 |
|
|
|
(3,445 |
) |
|
|
(7.9) |
% |
|
|
|
50 |
|
|
|
6.8 |
% |
|
|
6.1 |
|
|
|
(1,726 |
) |
|
|
(3.9) |
% |
|
|
Base |
|
|
7.5 |
% |
|
|
5.8 |
|
|
|
|
|
|
|
|
% |
|
|
|
-50 |
|
|
|
8.2 |
% |
|
|
5.6 |
|
|
|
1,695 |
|
|
|
3.9 |
% |
|
|
|
-100 |
|
|
|
8.9 |
% |
|
|
5.4 |
|
|
|
2,676 |
|
|
|
6.1 |
% |
|
|
|
-200 |
|
|
|
10.2 |
% |
|
|
5.0 |
|
|
|
4,177 |
|
|
|
9.5 |
% |
32
14. Sale and Securitization of Mortgage Loans
For the quarter and six month periods ended June 30, 2011, the unpaid principal balance of loan
sales and securitizations totaled $132.5 million and $253.3 million, respectively, and $79.3
million and $167.2 million for the comparable 2010 periods while the principal balance of loans for
which servicing was released or derecognized due to repurchases totalled $35.1 million and $84.6
million, for the six months ended June 30, 2011 and 2010, respectively.
Under most of the servicing agreements, the Company is required to advance funds to make scheduled
payments to investors, if payments due have not been received from the mortgagors. At June 30, 2011
and December 31, 2010, mortgage servicing advances totalled $54.0 million and $51.5 million,
respectively, net of a reserve of $8.8 million and $9.0 million, respectively.
In general, Doral Financials servicing agreements are terminable by the investors for cause. The
Companys servicing agreements with FNMA permit FNMA to terminate the Companys servicing rights if
FNMA determines that changes in the Companys financial condition have materially adversely
affected the Companys ability to satisfactorily service the mortgage loans. Approximately 28% of
Doral Financials mortgage loan servicing on behalf of third parties relates to mortgage servicing
for FNMA. Termination of Doral Financials servicing rights with respect to FNMA or other parties
for which it provides servicing could have a material adverse effect on the results of operations
and financial condition of Doral Financial. As of June 30, 2011, no servicing agreements have been
terminated.
33
15. Servicing Related Matters
At June 30, 2011, escrow funds and custodial accounts included approximately $79.4 million
deposited with Doral Bank PR. These funds are included within the cash and due from banks caption
in the Companys accompanying consolidated financial statements. Escrow funds and custodial
accounts also included approximately $42.7 million deposited with other banks, which were excluded
from the Companys assets and liabilities. The Company had fidelity bond and errors and omissions
coverage of $30.0 million and $17.0 million, respectively, as of June 30, 2011.
16. Other Real Estate Owned
The Company acquires real estate through foreclosure proceedings. Legal fees and other direct costs
incurred in a foreclosure are expensed as incurred. Real estate held for sale totalled $101.5
million and $100.3 million as of June 30, 2011 and December 31, 2010, respectively.
The following table provides the balances of other real estate held for sale for the periods
indicated:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Residential |
|
$ |
53,381 |
|
|
$ |
63,794 |
|
Commercial |
|
|
20,163 |
|
|
|
17,599 |
|
Construction and land |
|
|
27,955 |
|
|
|
18,880 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
101,499 |
|
|
$ |
100,273 |
|
|
|
|
|
|
|
|
The following table presents activity of OREO for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
103,767 |
|
|
$ |
100,345 |
|
|
$ |
100,273 |
|
|
$ |
94,219 |
|
Additions |
|
|
22,331 |
|
|
|
37,368 |
|
|
|
51,703 |
|
|
|
56,090 |
|
Sales |
|
|
(22,110 |
) |
|
|
(10,324 |
) |
|
|
(44,836 |
) |
|
|
(16,617 |
) |
Retirements |
|
|
(1,882 |
) |
|
|
(1,735 |
) |
|
|
(4,266 |
) |
|
|
(4,124 |
) |
Provision for OREO losses |
|
|
(607 |
) |
|
|
(22,477 |
) |
|
|
(1,375 |
) |
|
|
(26,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
101,499 |
|
|
$ |
103,177 |
|
|
$ |
101,499 |
|
|
$ |
103,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Deposits
The following table summarizes deposit balances:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Brokered certificates of deposit |
|
$ |
2,031,108 |
|
|
$ |
2,359,254 |
|
Certificates of deposit |
|
|
607,701 |
|
|
|
703,473 |
|
Money markets accounts |
|
|
554,528 |
|
|
|
475,467 |
|
NOW accounts and other transactions accounts |
|
|
414,061 |
|
|
|
411,633 |
|
Regular savings |
|
|
409,812 |
|
|
|
410,418 |
|
|
|
|
|
|
|
|
Total interest-bearing |
|
|
4,017,210 |
|
|
|
4,360,245 |
|
Non-interest-bearing deposits |
|
|
285,582 |
|
|
|
258,230 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
4,302,792 |
|
|
$ |
4,618,475 |
|
|
|
|
|
|
|
|
At June 30, 2011 and December 31, 2010, the Company reclassified from deposit accounts to loan
balances $0.5 million and $0.6 million, respectively, of overdrafts.
34
18. Securities Sold Under Agreements to Repurchase
As part of its financing activities the Company enters into sales of securities under agreements to
repurchase the same or substantially similar securities. The Company retains control over such
securities. Accordingly, the amounts received under these agreements represent borrowings, and the
securities underlying the agreements remain in the Companys asset accounts. These transactions are
carried at the amounts at which transactions will be settled. The counterparties to the contracts
generally have the right to repledge the securities received as collateral. Those securities are
presented in the Consolidated Statements of Financial Condition as part of pledged investment
securities. Securities sold under agreements to repurchase consisted of the following:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Repurchase agreements
with maturities ranging
from November 2012 to June
2015 (2010- March 2012 to
June 2015), at various
fixed rates averaging 2.42%
and 3.15%, at June 30,
2011 and December 31, 2010,
respectively. |
|
|
342,300 |
|
|
|
1,026,800 |
|
|
|
|
|
|
|
|
|
|
Callable repurchase
agreements with maturity
date from August 2014 to
January 2015, at various
fixed rates averaging 2.33%
at December 31, 2010 with
callable dates between July
and August 2012. |
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
Putable repurchase
agreement with a maturity
of February 17, 2014 at a
rate of 2.98% at June 30,
2011 and December 31, 2010,
with a callable date of
August 2011 (2010 -
February 2011). |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
$ |
442,300 |
|
|
$ |
1,176,800 |
|
|
|
|
|
|
|
|
Maximum repurchase agreements outstanding at any month end during the six month period ended June
30, 2011 were $1.2 billion. The approximate average daily outstanding balance of securities sold
under repurchase agreements for the six month period ended June 30, 2011 was $1.0 billion. The
weighted-average interest of such agreements, computed on a daily basis was 3.01% for the six month
period ended June 30, 2011.
During the second quarter of 2011 the Company substituted $515.0 million of securities sold under
agreements to repurchase with advances from FHLB and retired $219.5 million of securities sold
under agreements to repurchase upon the sale of investment securities pledged as collateral
incurring prepayment charges of $3.1 million.
35
19. Advances from FHLB
Advances from FHLB consisted of the following:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Non-callable advances with maturities
ranging from October 2011 to February
2016 (2010- January 2011 to May 2013) at
various fixed rates averaging 3.09% and
3.64%, at June 30, 2011 and December 31,
2010, respectively. |
|
$ |
1,188,849 |
|
|
$ |
747,420 |
|
|
|
|
|
|
|
|
|
|
Non-callable advances with maturities
ranging from September 2011 to November
2012, tied to 1-month LIBOR adjustable
monthly, at a variable rate of 0.21% and
0.28% at June 30, 2011 and December 31,
2010, respectively. |
|
|
74,000 |
|
|
|
74,000 |
|
|
|
|
|
|
|
|
|
|
Putable structured advances due on March
2012 at a fixed rate of 5.04% at June 30,
2011 and December 31, 2010, respectively,
putable at September 2011 (2010- March
2011). |
|
|
80,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,342,849 |
|
|
$ |
901,420 |
|
|
|
|
|
|
|
|
Maximum advances outstanding at any month end during the six month period ended June 30, 2011
were $1.3 billion. The approximate average daily outstanding balance of advances from FHLB for the
six month period ended June 30, 2011 was $1.0 billion. The weighted-average interest of such
advances, computed on a daily basis was 3.14% for the six month period ended June 30, 2011.
At June 30, 2011, the Company had pledged qualified collateral in the form of residential mortgage
loans with an estimated market value of $1.4 billion to secure the above advances from FHLB, which
generally the counterparty is not permitted to sell or repledge.
In January 2011, the Company entered into an agreement with the FHLB to exchange $555.4 million of
its non-callable term advances, reducing the average contractual interest rate on those advances to
1.7% from 4.1%, and the average effective interest rate from 4.1% to 2.7%, and extending the
average maturities to 39 months from 14 months. This transaction resulted in a $22.0 million fee
paid to FHLB, which is capitalized and amortized as yield adjustment over the term of the
borrowing.
During the second quarter of 2011 the Company increased its FHLB advances, using the proceeds to repay
securities sold under agreements to repurchase from the FHLB, reducing contractual interest rates
from 4.2% to 1.9%, and the average effective interest rate from 4.1%
to 3.7%, and extending average maturity from 2.3 years to 4.0 years. The transaction
resulted in a $40.2 million fee which is capitalized and amortized as a yield adjustment. The
proceeds from the increase in FHLB advances were used to repay other repurchase agreements, fund new loans, or were
retained in cash.
The FHLB advances are subject to early termination fees.
36
20. Loans Payable
At June 30, 2011 and December 31, 2010, loans payable consisted of financing agreements with local
financial institutions secured by mortgage loans.
Outstanding loans payable consisted of the following:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Secured borrowings
with local financial
institutions, at variable
interest rates tied to
3-month LIBOR averaging
1.76% and 1.74% at June 30,
2011 and December 31, 2010,
respectively,
collateralized by
residential mortgage loans. |
|
$ |
279,724 |
|
|
$ |
287,511 |
|
|
|
|
|
|
|
|
|
|
Secured borrowings with
local financial
institutions, at fixed
interest rates averaging
7.39% and 7.40% at June 30,
2011 and December 31, 2010,
respectively,
collateralized by
residential mortgage loans. |
|
|
14,899 |
|
|
|
16,524 |
|
|
|
|
|
|
|
|
|
|
$ |
294,623 |
|
|
$ |
304,035 |
|
|
|
|
|
|
|
|
The expected maturity date of secured borrowings based on collateral is from present to December
2025. Maximum loans payable outstanding at any month end during the six month period ended June 30,
2011 were $301.6 million. The approximate average daily outstanding balance of loans payable for
the six month period ended June 30, 2011 was $300.1 million. The weighted-average interest of such
borrowings, computed on a daily basis was 2.04% for the six month period ended June 30, 2011.
At June 30, 2011 and December 31, 2010, the Company had $119.7 million and $122.0 million,
respectively, of loans held for sale and $174.3 million and $180.4 million, respectively, of loans
receivable that were pledged to secure financing agreements with local financial institutions. Such
loans can be repledged by the counterparty.
37
21. Notes Payable
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
$30.0 million notes, net of discount,
bearing interest at 7.00%, due on
April 26, 2012, paying interest
monthly. |
|
$ |
29,921 |
|
|
$ |
29,875 |
|
|
|
|
|
|
|
|
|
|
$100.0 million notes, net of
discount, bearing interest at 7.65%,
due on March 26, 2016, paying
interest monthly. |
|
|
98,896 |
|
|
|
98,801 |
|
|
|
|
|
|
|
|
|
|
$40.0 million notes, net of discount,
bearing interest at 7.10%, due on
April 26, 2017, paying interest
monthly. |
|
|
39,524 |
|
|
|
39,492 |
|
|
|
|
|
|
|
|
|
|
$30.0 million notes, net of discount,
bearing interest at 7.15%, due on
April 26, 2022, paying interest
monthly. |
|
|
29,513 |
|
|
|
29,499 |
|
|
|
|
|
|
|
|
|
|
Bonds payable secured by mortgage on
building at fixed rates ranging from
6.75% to 6.90%, with maturities
ranging from December 2011 to
December 2029, paying interest
monthly. |
|
|
37,935 |
|
|
|
38,445 |
|
|
|
|
|
|
|
|
|
|
Bonds payable at a fixed rate of
6.25%, with maturities ranging from
December 2011 to December 2029,
paying interest monthly. |
|
|
7,300 |
|
|
|
7,400 |
|
|
|
|
|
|
|
|
|
|
Note payable with a local financial
institution, collateralized by IOs,
at a fixed rate of 7.75%, paying principal
and interest monthly, last payment due on December 2013. |
|
|
17,510 |
|
|
|
20,624 |
|
|
|
|
|
|
|
|
|
|
$250.0 million notes, net of
discount, bearing interest at a
variable interest rate (3-month LIBOR
plus 1.85%), due on July 21, 2020,
paying interest quarterly comencing
on January 2011. |
|
|
249,831 |
|
|
|
249,822 |
|
|
|
|
|
|
|
|
|
|
$ |
510,430 |
|
|
$ |
513,958 |
|
|
|
|
|
|
|
|
Doral Financial is the guarantor of various unregistered serial and term bonds issued by Doral
Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial, Tourist, Educational,
Medical and Environmental Control Facilities Financing Authority (AFICA). The bonds were issued
to finance the construction and development of the Doral Financial Plaza building, the headquarters
facility of Doral Financial. As of June 30, 2011, the outstanding principal balance of the bonds
was $45.2 million with fixed interest rates, ranging from 6.25% to 6.90%, and maturities ranging
from December 2011 to December 2029. Certain series of the bonds are secured by a mortgage on the
building and underlying real property.
On July 8, 2010, the Company, through its subsidiary, Doral Money, entered into a collateralized
loan obligation (CLO) arrangement with a third party in which up to $450.0 million of largely
U.S. mainland based commercial loans are pledged to collateralize AAA rated debt of $250.0 million
paying three month LIBOR plus 1.85 percent issued by Doral CLO I, Ltd. Doral CLO I, Ltd. is a
variable interest entity created to hold commercial loans and issue the previously noted debt and
$200.0 million of subordinated notes to the Company whereby the Company receives any excess
proceeds after payment of the senior debt interest and other fees and charges specified in the
indenture agreement. The Company also serves as collateral manager of the assets of Doral CLO I,
Ltd. Doral CLO I, Ltd. is consolidated with the Company in these financial statements.
DLAM, LLC is a subsidiary of Doral Money and holds the $200.0 million of subordinated notes issued
by Doral CLO I, Ltd.
DLAM, LLC is consolidated with the Company in these financial statements.
22. Income Taxes
Background
Income taxes include Puerto Rico income taxes as well as applicable U.S. federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are generally
required to pay U.S. income taxes only with respect to their income derived from the active conduct
of a trade or business in the United States (excluding Puerto Rico) and certain investment income
derived from U.S. assets. Any such tax is creditable, with certain limitations, against Puerto Rico
income taxes. Except for the operations of Doral Bank US and Doral Money, substantially all of the
Companys operations are conducted through subsidiaries in Puerto Rico. Doral Bank US and Doral
Money are U.S. corporations and are subject to U.S. income-tax on their income derived from all
sources.
38
Until December 31, 2010, the maximum statutory corporate income tax rate in Puerto Rico was 39.00%.
Under the 1994 Puerto Rico Internal Revenue Code, as amended (1994 Code), Corporations are not
permitted to file consolidated returns with their subsidiaries and affiliates. Doral Financial is
entitled to a 100% dividend received deduction on dividends received from Doral Bank PR or any
other Puerto Rico subsidiary subject to tax under the Puerto Rico tax code.
On March 9, 2009, the Governor of Puerto Rico signed into law the Special Act Declaring a State of
Fiscal Emergency and Establishing an Integral Plan of Fiscal Stabilization to Save Puerto Ricos
Credit, Act No. 7 (the Act). Pursuant to the Act, Section 1020A was introduced to the Code to
impose a 5.00% surtax over the total tax determined for corporations, partnerships, trusts, estates,
as well as individuals whose combined gross income exceeds $100,000 or married individuals filing
jointly whose gross income exceeds $150,000. This surtax is effective for tax years commenced after
December 31, 2008 and before January 1, 2012. This increased the Companys income tax rate from
39.00% to 40.95% for tax years from 2009 through 2011.
On November 15, 2010, Act 171 was enacted into law (Act 171) generally providing, among other
things: (1) an income tax credit equal to 7.00% of the tax liability due to corporations that paid
the Christmas bonus required by local labor laws, and (2) extending to 10 years the carry forward
term of net operating losses incurred for years commenced after December 31, 2004 and before
December 31, 2012.
On January 31, 2011, the Governor signed into law the Internal Revenue Code of 2011 (2011 Code)
making the 1994 Code largely ineffective, for years commenced after December 31, 2010. Under the
provisions of the 2011 Code, the maximum statutory corporate income tax rate in 30.00% for years
starting after December 31, 2010 and ending before January 1, 2014; if the government meets its
income generation and expense control goals, for years started after December 31, 2013, the maximum
corporate tax rate will be 25.00%. The 2011 Code eliminated the
special 5.00% surtax on corporations for
tax year 2011. In general, the 2011 Code maintains the extension in the carry forward periods for
net operating losses from 7 to 10 years as provided for in Act 171; maintains the concept of the
alternative minimum tax although it changed the way it is computed; allows limited liability
companies to have flow-through treatment under certain circumstances; imposes additional
restriction on the use of net operating loss carry forwards after certain types of reorganizations
and/or changes in control; and specifies what types of auditors report will be acceptable when
audited financial statements are required to be filed with the income tax return. Additionally,
the 2011 Code provides for changes in the implications of being in a controlled group of
corporations and/or a group of related corporations. Notwithstanding the 2011 Code, a corporation
may be subject to the provisions of the 1994 Code if it so elects by the time it files its income
tax return for the first year commenced after December 31, 2010 and ending before January 1, 2012.
If the election is made to remain subject to the provisions of the 1994 Code, such election will be
effective that year and the next four succeeding years.
The Company is evaluating the impact of the tax reform on its results of operations including the
election to be taxed under the 1994 Code. Nevertheless, the Company recorded its deferred tax
assets estimated to reverse after 2015 at the 30.00% tax rate required for all taxable earnings
beginning in 2016, which is the latest taxable year that it would be permitted to elect taxation
under the 1994 Code. Puerto Rico deferred tax assets subject to the maximum statutory tax rate and
estimated to reverse prior to 2016, together with any related valuation allowance, are recorded at
the 39.00% tax rate pursuant to the 1994 Code. Upon determination of which alternative treatment will
be followed, the Company will adjust its deferred tax assets for any required tax rate change, if
applicable. Adoption of the 2011 Code as of June 30, 2011 would represent an additional deferred
tax expense of $8.4 million.
Income Tax Expense
The components of income tax expense are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Current income tax expense United States |
|
$ |
3,101 |
|
|
$ |
3,615 |
|
|
$ |
5,475 |
|
|
$ |
3,890 |
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
|
450 |
|
|
|
1,008 |
|
|
|
3,120 |
|
|
|
2,795 |
|
United States |
|
|
(680 |
) |
|
|
(136 |
) |
|
|
(627 |
) |
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax (benefit) expense |
|
|
(230 |
) |
|
|
872 |
|
|
|
2,493 |
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
2,871 |
|
|
$ |
4,487 |
|
|
$ |
7,968 |
|
|
$ |
7,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current income tax expense of $3.1 million and $5.5 million for the quarter and six month
periods ended June 30, 2011, respectively, was related to taxes on U.S. source income. The deferred
tax benefit of $0.2 million and deferred tax expense of $2.5 million for the quarter and six month
periods ended June 30, 2011 reflected reductions over the comparable periods in 2010 due to higher
taxes recognized in 2010 related to U.S. source income, as well as the impact of tax rate change on
the current period valuation allowance, partially offset by realization of operational deferred tax
assets. The Puerto Rico deferred income tax expense of $3.1
39
million for the six months ended June 30, 2011 was related to the net effect on the Companys
deferred tax assets of (i) Puerto Rico tax legislation approved in January 2011 lowering the
effective tax rate, resulting in a deferred tax expense of $18.8 million,
(ii) the increased earnings expectation for profitable Puerto Rico entities which resulted in a
deferred tax benefit of $17.4 million, and (iii) net
amortization of deferred taxes of $1.7
million.
Deferred Tax Components
The Companys DTA consists primarily of the differential in the tax basis of IOs sold, net
operating loss carry-forwards and other temporary differences arising from the daily operations of
the Company.
The Company has entered into several agreements with the Puerto Rico Treasury Department related to
the intercompany transfers of IOs (The IO Tax Asset or IO) and its tax treatment thereon. Under
the agreements, the Company established the tax basis of all the IO transfers, clarified that for
Puerto Rico income tax purpose, the IO Tax Asset is a stand-alone intangible asset subject to
straight-line amortization based on a useful life of 15 years, and established that the IO Tax
Asset could be transferred to any entity within the Doral Financial corporate group, including the
Puerto Rico banking subsidiary. During the third quarter of 2009, the Company entered into an
agreement with the Puerto Rico Treasury Department that granted the Company a two year moratorium
of the amortization of the IO Tax Asset. This agreement resulted in a benefit of $11.2 million for
the third quarter of 2009 and was effective for the taxable year beginning January 1, 2009. The
realization of the deferred tax asset related to the differential in the tax basis of IOs sold is
dependent upon the existence of, or generation of, taxable income during the remaining 12 year
period (15 year original amortization period, 17 year original amortization period including the
two year moratorium) in which the amortization of the IO Tax Asset is available. The IOs expire in
2022. Any IO amortization in excess of all legal entities taxable income would become a NOL
subject to the 7 or 10 year carry-over period. Upon a business combination, which is not
structured as a purchase of assets, the IOs should survive and be available to be used by the
groups legal entities.
NOLs generated between 2005 and 2011 can be carried forward for a period of 10 years (there is no
carry-back allowed in Puerto Rico). The NOLs creating deferred tax assets as of June 30, 2011,
expire beginning in 2016 until 2021 for Puerto Rico entities and 2025 through 2029 for United
States entities filing in New York. Since each legal entity files a separate income tax return, the
NOLs can only be used to offset future taxable income of the entity that incurred it.
The Company evaluates its deferred tax asset for realizability, and the deferred tax asset is
reduced by a valuation allowance if, based on the weight of available evidence, it is more likely
than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will
not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to
the amount that is more likely than not to be realized.
In assessing the realization of deferred tax assets, the Company considers the expected reversal of
its deferred tax assets and liabilities, projected future taxable income, cumulative losses in
recent years, and tax planning strategies. The determination of a valuation allowance on deferred
tax assets requires judgment based on the weight of all available evidence and considering the
relative impact of negative and positive evidence.
As of June 30, 2011, the Company had two Puerto Rico entities which had incurred several
consecutive years of losses. For purposes of assessing the realization of the DTAs, the loss
position for these two entities is considered significant negative evidence that has caused
management to conclude that the Company will not be able to fully realize the deferred tax assets
related to these two entities in the future. Accordingly, as of June 30, 2011 and December 31,
2010, the Company determined that it was more likely than not that $441.2 million and $462.7
million, respectively, of its gross deferred tax asset would not be realized and maintained a
valuation allowance for that amount.
40
As of June 30, 2011 and December 31, 2010, the Companys
deferred tax assets were as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Deferred income tax asset resulting from: |
|
|
|
|
|
|
|
|
Differential in tax basis of IOs sold |
|
$ |
207,797 |
|
|
$ |
237,912 |
|
Net operating loss carry-forwards |
|
|
226,509 |
|
|
|
193,322 |
|
Allowance for loan and lease losses |
|
|
36,868 |
|
|
|
48,635 |
|
Capital loss carry-forward |
|
|
18,227 |
|
|
|
26,783 |
|
Reserve for losses on OREO |
|
|
13,367 |
|
|
|
17,340 |
|
Other |
|
|
42,378 |
|
|
|
44,445 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
545,146 |
|
|
|
568,437 |
|
Valuation allowance |
|
|
(441,188 |
) |
|
|
(462,725 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
103,958 |
|
|
$ |
105,712 |
|
|
|
|
|
|
|
|
As of June 30, 2011 and December 31, 2010, the deferred tax asset valuation allowance off-set
the following deferred tax assets:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Differential in tax basis of IOs sold |
|
$ |
115,494 |
|
|
$ |
143,550 |
|
Net operating loss carry-forwards |
|
|
220,376 |
|
|
|
186,447 |
|
Allowance for loan and lease losses |
|
|
34,161 |
|
|
|
45,950 |
|
Capital loss carry-forward |
|
|
18,224 |
|
|
|
26,779 |
|
Reserve for losses on OREO |
|
|
13,321 |
|
|
|
17,294 |
|
Other |
|
|
39,612 |
|
|
|
42,705 |
|
|
|
|
|
|
|
|
Total valuation allowance |
|
$ |
441,188 |
|
|
$ |
462,725 |
|
|
|
|
|
|
|
|
The valuation allowance also includes $0.8 million and $1.3 million related to deferred taxes
on unrealized losses on cash flow hedges as of June 30, 2011 and December 31, 2010, respectively.
Management did not establish a valuation allowance on the deferred tax assets generated on the
unrealized gains and losses of its securities available for sale as of June 30, 2011 and December
31, 2010 because the Company had the positive intent and the ability to hold the securities until
maturity or recovery of value.
41
As of June 30, 2011 and December 31, 2010, the deferred tax asset by legal entity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
|
Doral |
|
|
|
|
|
|
Doral |
|
|
Doral |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Doral |
|
|
Mortgage |
|
|
Insurance |
|
|
Doral |
|
|
Doral |
|
|
|
|
(In thousands) |
|
Corporation |
|
|
Bank PR |
|
|
LLC |
|
|
Agency |
|
|
Money |
|
|
Bank FSB |
|
|
Total |
|
Differential in tax basis of IOs sold |
|
$ |
207,797 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
207,797 |
|
Net operating loss carry-forwards |
|
|
48,544 |
|
|
|
171,832 |
|
|
|
5,030 |
|
|
|
|
|
|
|
|
|
|
|
1,103 |
|
|
|
226,509 |
|
Allowance for loan and lease losses |
|
|
4,178 |
|
|
|
29,983 |
|
|
|
|
|
|
|
|
|
|
|
2,194 |
|
|
|
513 |
|
|
|
36,868 |
|
Capital loss carry-forward |
|
|
849 |
|
|
|
17,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
18,227 |
|
Reserve for losses on OREO |
|
|
3,278 |
|
|
|
10,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
13,367 |
|
Unrealized gains on investment
securities available for sale |
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474 |
|
Other |
|
|
15,109 |
|
|
|
25,352 |
|
|
|
172 |
|
|
|
2,905 |
|
|
|
221 |
|
|
|
278 |
|
|
|
44,037 |
|
|
|
|
Deferred tax assets |
|
|
280,229 |
|
|
|
254,585 |
|
|
|
5,202 |
|
|
|
2,905 |
|
|
|
2,415 |
|
|
|
1,943 |
|
|
|
547,279 |
|
Unrealized gains on investment
securities available for sale |
|
|
|
|
|
|
(1,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,095 |
) |
Other |
|
|
(549 |
) |
|
|
(324 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
(1,038 |
) |
|
|
|
Deferred tax liabilities |
|
|
(549 |
) |
|
|
(1,419 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
(2,133 |
) |
Valuation allowance |
|
|
(186,927 |
) |
|
|
(254,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(441,188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
92,753 |
|
|
$ |
(1,095 |
) |
|
$ |
5,082 |
|
|
$ |
2,905 |
|
|
$ |
2,370 |
|
|
$ |
1,943 |
|
|
$ |
103,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
Doral |
|
|
|
|
|
|
Doral |
|
|
Doral |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Doral |
|
|
Mortgage |
|
|
Insurance |
|
|
Doral |
|
|
Doral |
|
|
|
|
(In thousands) |
|
Corporation |
|
|
Bank PR |
|
|
LLC |
|
|
Agency |
|
|
Money |
|
|
Bank FSB |
|
|
Total |
|
Differential in tax basis of IOs sold |
|
$ |
237,912 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
237,912 |
|
Net operating loss carry-forwards |
|
|
46,634 |
|
|
|
139,813 |
|
|
|
5,963 |
|
|
|
83 |
|
|
|
|
|
|
|
829 |
|
|
|
193,322 |
|
Allowance for loan and lease losses |
|
|
3,554 |
|
|
|
42,396 |
|
|
|
|
|
|
|
|
|
|
|
2,098 |
|
|
|
587 |
|
|
|
48,635 |
|
Capital loss carry-forward |
|
|
6,776 |
|
|
|
20,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
26,783 |
|
Reserve for losses on OREO |
|
|
4,903 |
|
|
|
12,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
17,340 |
|
Other |
|
|
14,887 |
|
|
|
29,403 |
|
|
|
178 |
|
|
|
2,935 |
|
|
|
14 |
|
|
|
100 |
|
|
|
47,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
314,666 |
|
|
|
244,006 |
|
|
|
6,141 |
|
|
|
3,018 |
|
|
|
2,112 |
|
|
|
1,566 |
|
|
|
571,509 |
|
Unrealized gains on investment
securities available for sale |
|
|
|
|
|
|
(1,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,889 |
) |
Other |
|
|
(700 |
) |
|
|
(299 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
(1,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(700 |
) |
|
|
(2,188 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
(3,072 |
) |
Valuation allowance |
|
|
(219,017 |
) |
|
|
(243,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(462,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
94,949 |
|
|
$ |
(1,890 |
) |
|
$ |
6,006 |
|
|
$ |
3,018 |
|
|
$ |
2,063 |
|
|
$ |
1,566 |
|
|
$ |
105,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico deferred tax assets subject to the maximum statutory tax rate and estimated to
reverse prior to 2016, together with any related valuation allowance, are recorded at the tax rate
in effect under the 1994 Code, 39.00% or 40.95% as applicable. As of June 30, 2011, DTAs totalling
$457.7 million were at the higher rates with a valuation
allowance of $422.3 million. DTAs of $62.4
million were at the 30.00% tax rate while DTAs of $25.1 million
with a valuation allowance of $18.9
million, were at other tax rates (and would not be impacted by the change in the tax code). If the
Company elects to adopt the 2011 Code, DTAs would be $439.4 million with a valuation allowance of
$343.7 million for a net DTA of $95.7 million.
For Puerto Rico taxable entities with positive core earnings, a valuation allowance on deferred tax
assets has not been recorded since they are expected to continue to be profitable. At June 30,
2011, the net deferred tax asset associated with these two companies was $8.0 million, compared to
$9.0 million at December 31, 2010. In addition, approximately, $92.3 million of the IO tax asset
maintained at the holding company would be realized through these entities. In managements
opinion, for these companies, the positive evidence of profitable core earnings outweighs any negative evidence.
42
Failure to achieve sufficient projected taxable income in the entities and deferred tax assets
where a valuation allowance has not been established, might affect the ultimate realization of the
net deferred tax assets.
Management assesses the realization of its deferred tax assets at each reporting period. To the
extent that earnings improve and the deferred tax assets become realizable, the Company may be able
to reduce the valuation allowance through earnings.
Accounting for Uncertainty in Income Taxes
As of June 30, 2011, the Company did not have unrecognized tax benefits and had accrued interest of
$0.8 million on previously unrecognized tax benefits. The Company classifies all interest related
to tax uncertainties as income tax expense.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons
including adding amounts for current tax year positions, expiration of open income tax returns due
to the expiration of statutes of limitation, changes in managements judgment about the level of
uncertainty, status of examinations, litigation and legislative activity, and the addition or
elimination of uncertain tax positions. During the third quarter of 2010, the Company settled its
uncertain tax positions. As of June 30, 2011, the following years remain subject to examination:
U.S. Federal jurisdictions 2004 through 2008 and Puerto Rico 2005 through 2008.
During the six months ended June 30, 2011, the Company did not identify any additional uncertain
tax position.
23. Guarantees
In the ordinary course of the business, Doral Financial makes certain representations and
warranties to purchasers and insurers of mortgage loans at the time of the loan sales to third
parties regarding the characteristics of the loans sold, and in certain circumstances, such as in
the event of early or first payment default. To the extent the loans do not meet specified
characteristics, if there is a breach of contract of a representation or warranty or if there is an
early payment default, Doral Financial may be required to repurchase the mortgage loan and bear any
subsequent loss related to the loan. For the six month period ended June 30, 2011, repurchases
totalled $4.2 million, compared to $50,000 for the corresponding 2010 period. These repurchases
were at fair value and no significant losses were incurred.
In the past, in relation to its asset securitizations and loan sale activities, the Company sold
pools of delinquent FHA, VA and conventional mortgage loans on a servicing retained basis.
Following these transactions, the loans are not reflected on Doral Financials Consolidated
Statement of Financial Condition. Under these arrangements, as part of its servicing
responsibilities, Doral Financial is required to advance the scheduled payments of principal,
interest and taxes whether or not collected from the underlying borrower. While Doral Financial
expects to recover a significant portion of the amounts advanced through foreclosure or, in the
case of FHA and VA loans, under the applicable FHA and VA insurance and guarantee programs, the
amounts advanced tend to be greater than normal arrangements because of the delinquent status of
the loans. As of June 30, 2011 and December 31, 2010, the outstanding principal balance of such
delinquent loans was $125.1 million and $139.6 million, respectively.
In addition, Doral Financials loan sale activities in the past included certain mortgage loan sale
and securitization transactions subject to recourse arrangements that require Doral Financial to
repurchase or substitute the loan if the loans are 90 120 days or more past due or otherwise in
default. The Company is also required to pay interest on delinquent loans in the form of servicing
advances. Under certain of these arrangements, the recourse obligation is terminated upon
compliance with certain conditions, which generally involve: (i) the lapse of time (normally from
four to seven years), (ii) the lapse of time combined with certain other conditions such as the
unpaid principal balance of the mortgage loans falling below a specific percentage (normally less
than 80%) of the appraised value of the underlying property, or (iii) the amount of loans
repurchased pursuant to recourse provisions reaching a specific percentage of the original
principal amount of loans sold (generally from 10% to 15%). As of June
43
30, 2011 and December 31, 2010, the Companys records reflected that the outstanding principal
balance of loans sold subject to full or partial recourse was $0.7 billion and $0.8 billion,
respectively. As of such dates, the Companys records also reflected that the maximum contractual
exposure to Doral Financial if it were required to repurchase all loans subject to recourse was
$0.7 billion. Doral Financials contingent obligation with respect to its recourse provision is not
reflected on the Companys Consolidated Financial Statements, except for a liability of estimated
losses from such recourse agreements, which is included as part of Accrued expenses and other
liabilities. The Company discontinued the practice of selling loans with recourse obligations in
2005. Doral Financials current strategy is to sell loans on a non-recourse basis, except recourse
for certain early payment defaults and industry standard representations and warranties. For the
quarter and six month period ended June 30, 2011, the Company repurchased at fair value $1.4
million and $5.8 million, respectively, pursuant to recourse provisions, compared to $6.7 million
and $14.0 million, respectively, for the corresponding periods of 2010.
Doral Financials reserve for its exposure to recourse amounted to $10.1 million and $10.3 million
as of June 30, 2011 and December 31, 2010, respectively and the reserve for other credit-enhanced
transactions explained above amounted to $8.8 million and $9.0 million as of June 30, 2011 and
December 31, 2010, respectively.
The following table shows the changes in the Companys liability of estimated losses from recourse
agreements, included in the Statement of Financial Condition, for each of the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Month Period Ended |
|
(In thousands) |
|
June 30, 2011 |
|
|
June 30, 2011 |
|
Balance at beginning of period |
|
$ |
9,877 |
|
|
$ |
10,264 |
|
Net charge-offs / termination |
|
|
(100 |
) |
|
|
(728 |
) |
Provision for recourse liability |
|
|
352 |
|
|
|
593 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
10,129 |
|
|
$ |
10,129 |
|
|
|
|
|
|
|
|
24. Financial Instruments with Off-Balance Sheet Risk
The following tables summarize Doral Financials commitments to extend credit, commercial and
performance standby letters of credit and commitments to sell loans.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Commitments to extend credit |
|
$ |
146,982 |
|
|
$ |
139,791 |
|
Commitments to sell loans |
|
|
98,123 |
|
|
|
64,751 |
|
Commercial and Performance standby letter of credit |
|
|
2,664 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total |
|
$ |
247,769 |
|
|
$ |
204,567 |
|
|
|
|
|
|
|
|
The Company enters into financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments may include
commitments to extend credit and sell loans. The contractual amounts of these instruments reflect
the extent of involvement the Company has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration dates or other
termination clauses. Generally, the Company does not enter into interest rate lock agreements with
borrowers.
The Company purchases mortgage loans and simultaneously enters into a sale and securitization
agreement with the same counterparty, essentially a forward contract that meets the definition of a
derivative during the period between trade and settlement date.
A letter of credit is an arrangement that represents an obligation on the part of the Company to a
designated third party, contingent upon the failure of the Companys customer to perform under the
terms of the underlying contract with a third party. The amount of the letter of credit represents
the maximum amount of credit risk in the event of non-performance by these customers. Under the
terms of a letter of credit, an obligation arises only when the underlying event fails to occur as
intended, and the obligation is generally up to a stipulated amount and with specified terms and
conditions. Letters of credit are used by the customer as a credit enhancement and typically expire
without having been drawn upon.
44
The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of
collateral, if deemed necessary by the Company upon extension of credit, is based on managements
credit evaluation of the counterparty.
25. Commitments and Contingencies
Total minimum rental and operating commitments for leases in effect at June 30, 2011, were as
follow:
|
|
|
|
|
(In thousands) |
|
|
|
|
2012 |
|
$ |
6,225 |
|
2013 |
|
|
6,191 |
|
2014 |
|
|
5,408 |
|
2015 |
|
|
5,183 |
|
2016 |
|
|
5,049 |
|
2017 and thereafter |
|
|
22,860 |
|
|
|
|
|
|
|
$ |
50,916 |
|
|
|
|
|
Rent expense for the quarter and six month period ended June 30, 2011 totalled approximately $2.2
million and $4.3 million, respectively, compared to $1.7 million and $3.4 million, respectively for
the corresponding 2010 periods.
Doral Financial and its subsidiaries are defendants in various lawsuits or arbitration proceedings
arising in the ordinary course of business, including employment related matters. Management
believes, based on the opinion of legal counsel, that the aggregated liabilities, if any, arising
from such actions will not have a material adverse effect on the financial condition or results of
operations of Doral Financial.
Since 2005, Doral Financial became a party to various legal proceedings, including regulatory and
judicial investigations and civil litigation, arising as a result of the Companys restatement. For
additional information on Legal Matters and Banking Regulatory Matters refer to Note 32 of the
financial statements on the Companys 2010 Annual Report on Form 10-K.
26. Stock Option and Other Incentive Plans
On April 8, 2008, the Companys Board of Directors approved the 2008 Stock Incentive Plan (the
Plan) subject to shareholder approval, which was obtained at the annual shareholders meeting
held on May 7, 2008. The Plan replaced the 2004 Omnibus Incentive Plan. Stock options granted are
expensed over the stock option vesting period based on fair value which is determined using the
Black-Scholes option-pricing method at the date the options are granted.
The aggregate number of shares of common stock which the Company may issue under the Plan is
limited to 6,750,000. No options were granted by the Company for the six month period ended June
30, 2011.
On July 22, 2008, four independent directors were each granted 2,000 shares of restricted stock and
stock options to purchase 20,000 shares of common stock at an exercise price equal to the closing
price of the stock on the grant date. The restricted stock became 100% vested during the first
quarter of 2010. The stock options vest ratably over a five year period commencing with the grant
date.
On June 25, 2010, the Board of Directors of Doral Financial Corporation approved and adopted a
retention program for six of the Companys officers (the Retention Program). Pursuant to the
Retention Program, the Company granted 3,000,000 shares of the Companys common stock as restricted
stock to such officers. The restricted stock will vest in installments so long as at the time of
vesting the employee has been continuously employed by the Company from the date of grant, as
follows: 33% will vest 12 calendar months after the grant date, an additional 33% will vest 24
calendar months after the grant date, and the remaining 33% will vest 36 calendar months after the
grant date. Notwithstanding the foregoing, 100% of the restricted stock will vest (i) upon the
occurrence of a change of control of the Company; (ii) if the Companys terminates the employees
employment without cause or the employee terminates his or her employment for good reason (as
defined in the agreement); or (iii) upon such employees death.
On March 22, 2011, five directors were each granted 25,000 shares of restricted stock. The
restricted stock will vest in installments as follows: (i) 50% of the shares shall vest 12 calendar
months after the grant date, and (ii) an additional 50% of the shares will vest 24 calendar months
after the grant date. In April 2011, five officers were granted a total of 1,192,728 shares of restricted stock
45
with similar conditions as those
granted in June 2010.
Stock-based compensation recognized was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Stock-based compensation recognized, net |
|
$ |
1,043 |
|
|
$ |
56 |
|
|
$ |
1,703 |
|
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized at end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
95 |
|
|
$ |
214 |
|
|
$ |
95 |
|
|
$ |
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock |
|
$ |
6,581 |
|
|
$ |
8,182 |
|
|
$ |
6,581 |
|
|
$ |
8,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the options granted in 2008 was estimated using the Black-Scholes
option-pricing model, with the following assumptions:
|
|
|
|
|
Weighted-average exercise price |
|
$ |
13.70 |
|
Stock option estimated fair value |
|
$ |
5.88 |
|
Expected stock option term (years) |
|
|
6.50 |
|
Expected volatility |
|
|
39.00 |
% |
Expected dividend yield |
|
|
|
% |
Risk-free interest rate |
|
|
3.49 |
% |
Expected volatility is based on the historical volatility of the Companys common stock over a
ten-year period. The Company uses empirical research data to estimate options exercise and employee
termination within the valuation model; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve in effect at
the time of grant. The expected dividend yield is based on managements expectation that the
Company will not resume dividend payments on its Common Stock for the foreseeable future.
Doral Financials nonvested restricted stock activity for the quarter and six months ended June 30,
2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
Nonvested Restricted Shares |
|
Shares |
|
|
Value |
|
Nonvested at December 31, 2010 |
|
|
3,000,000 |
|
|
$ |
2.74 |
|
Granted |
|
|
125,000 |
|
|
|
1.17 |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2011 |
|
|
3,125,000 |
|
|
|
2.68 |
|
Granted |
|
|
1,192,728 |
|
|
|
1.11 |
|
Vested |
|
|
(1,000,000 |
) |
|
|
(2.74 |
) |
|
|
|
|
|
|
|
Nonvested at June 30, 2011 |
|
|
3,317,728 |
|
|
$ |
2.10 |
|
|
|
|
|
|
|
|
As of June 30, 2011, the total amount of unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plan was approximately $6.7 million related
to stock options and restricted stock granted. That cost is expected to be recognized over a period
of 4 years for the stock options and 3 years for the restricted stock. As of June 30, 2011, the
total fair value of stock options and restricted stock was $10.3 million.
46
27. Earnings (Losses) Per Share Data
The reconciliation of the numerator and denominator of the earnings (losses) per share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands, except per share amounts) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,477 |
|
|
$ |
(233,311 |
) |
|
$ |
7,800 |
|
|
$ |
(236,814 |
) |
Non-convertible preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock dividend |
|
|
(2,415 |
) |
|
|
(2,415 |
) |
|
|
(4,830 |
) |
|
|
(4,279 |
) |
Effect of conversion of preferred stock (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
$ |
2,062 |
|
|
$ |
(235,726 |
) |
|
$ |
2,970 |
|
|
$ |
(214,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Number of Common Shares Outstanding (2) |
|
|
127,293,756 |
|
|
|
67,285,568 |
|
|
|
127,293,756 |
|
|
|
64,920,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) per Common Share (3) |
|
$ |
0.02 |
|
|
$ |
(3.50 |
) |
|
$ |
0.02 |
|
|
$ |
(3.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The carrying value of the noncumulative preferred stock exceeded the fair value of
consideration transferred and, accordingly, the difference between the liquidation preference
of the preferred stock retired and the market value of the common stock issued amounted to
$31.6 million for the six month period ended June 30, 2010, and was credited to retained
earnings. In the case of the convertible preferred stock, the fair value of stock exchanged
for the preferred stock converted exceeded the fair value of the stock issuable pursuant to
the original conversion terms and, accordingly, this excess or inducement amounted to $5.1
million for the six month periods ended June 30, 2010 and was charged to retained earnings. As a
result, both transactions impacted the net income (loss) attributable to common shareholders. |
|
(2) |
|
Potential common shares consist of common stock issuable under the assumed exercise
of stock options and unvested shares of restricted stock using the treasury stock method. This
method assumes that the potential common shares are issued and the proceeds from exercise in
addition to the amount of compensation cost attributed to future services are used to purchase
common stock at the exercise date. The difference between the number of potential shares
issued and the shares purchased is added as incremental shares to the actual number of shares
outstanding to compute diluted earnings per share. Stock options and unvested shares of
restricted stock that result in lower potential shares issued than shares purchased under the
treasury stock method are not included in the computation of dilutive earnings (losses) per
share since their inclusion would have an antidilutive effect in earnings per share. As of
June 30, 2011, there were granted 60,000 stock options and 4,323,728 shares of restricted
stock. |
|
(3) |
|
For the quarters and six month periods ended June 30, 2011 and 2010, net income
(loss) per common share represents both the basic and diluted earnings (losses) per common
share, respectively, for each of the periods presented. |
On March 20, 2009, the Board of Directors of Doral Financial announced that it had suspended
the declaration and payment of all dividends on all of Doral Financials outstanding series of
cumulative and non-cumulative preferred stock. The suspension of dividends was effective and
commenced with the dividends for the month of April 2009 for Doral Financials three outstanding
series of non-cumulative preferred stock, and the dividends for the second quarter of 2009 for
Doral Financials one outstanding series of cumulative preferred stock.
For the quarters ended June 30, 2011 and 2010, there were 813,526 shares of the Companys 4.75%
perpetual cumulative convertible preferred stock that were excluded from the computation of diluted
earnings per share because their effect would have been antidilutive. Each share of convertible
preferred stock is currently convertible into 0.31428 shares of common stock, subject to adjustment
under specific conditions. The option of the purchasers to convert the convertible preferred stock
into shares of the Companys common stock is exercisable only (a) if during any fiscal quarter
after September 30, 2003, the closing sale price of the Companys common stock for at least 20
trading days in a period of 30 consecutive trading days ending on the last trading date of the
preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred stock
(currently 120% of $795.47, or $954.56); (b) upon the occurrence of certain corporate transactions;
or (c) upon the delisting of the Companys common stock. On or after September 30, 2008, the
Company may, at its option, cause the convertible preferred stock to be converted into the number
of shares of common stock that are issuable at the conversion price. The Company may only exercise
its conversion right if the closing sale price of the Companys common stock exceeds 130% of the
conversion price of the convertible preferred stock (currently 130% of $795.47, or $1,034.11) in
effect for 20 trading days within any period of 30 consecutive trading days ending on a trading day
not more than two trading days prior to the date the Company gives notice of conversion.
47
28. Fair Value of Assets and Liabilities
The Company uses fair value measurements to state certain assets and liabilities at fair value and
to support fair value disclosures.
Securities held for trading, securities available for sale, derivatives and servicing assets are
recorded at fair value on a recurring basis. Additionally, from time to time, Doral may be required
to record other financial assets at fair value on a nonrecurring basis, such as loans held for
sale, loans receivable and certain other assets. These nonrecurring fair value adjustments
typically involve application of lower-of-cost-or-market accounting or write-downs of individual
assets.
The Company discloses for interim and annual reporting periods the fair value of all financial
instruments for which it is practicable to estimate that value, whether recognized or not in the
statement of financial position.
Fair Value Hierarchy
The Company categorizes its financial instruments based on priority of inputs to the valuation
technique into a three level hierarchy described below.
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Valuation is based upon unadjusted quoted prices for identical
instruments traded in active markets. |
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques for which all significant assumptions
are observable in the market, or are derived principally from or corroborated by
observable market data, by correlation or by other means. |
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable assumptions
reflect the Companys estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques. |
Determination of Fair Value
The Company bases fair values on the price that would be received upon sale of an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement
date. It is Doral Financials intent to maximize the use of observable inputs and minimize the use
of unobservable inputs when developing fair value measurements, in accordance with the fair value
hierarchy.
Fair value measurements for assets and liabilities where there is limited or no observable market
data are based primarily upon the Companys estimates, and are generally calculated based on
current pricing policy, the economic and competitive environment, the characteristics of the asset
or liability and other such factors. Therefore, the fair values represent managements estimates
and may not be realized in an actual sale or immediate settlement of the asset or liability.
Additionally, there may be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future cash flows, could
significantly affect the results of current or future values.
The Company relies on appraisals for valuation of collateral dependent impaired loans and other
real estate owned. An appraisal of value is obtained at the time the loan is originated. New
estimates of collateral value are obtained when a loan that has been performing becomes delinquent
and is determined to be collateral dependent, and at the time an asset is acquired through
foreclosure. Updated reappraisals are requested at least every two years for collateral dependent
loans and other real estate owned.
Residential mortgage loans are considered collateral dependent when they are 180 days past due
(collateral dependent residential mortgage loans are those past due loans whose borrowers
financial condition has deteriorated to the point that Doral considers only the collateral when
determining its allowance for loan and lease loss estimate). An updated estimate of propertys
value is obtained when the loan is 180 days past due, and a second assessment of value is obtained
when the loan is 360 days past due. The Company generally uses broker price opinions (BPOs) as an
assessment of value of collateral dependent residential mortgage loans.
As it takes a period of time for commercial loan appraisals to be completed once they are
requested, Doral must at times estimate its allowance for loan and lease losses for an impaired
loan using a dated, or stale, appraisal. As Puerto Rico has experienced some decrease in property
values during its extended recession, the reported values of the stale appraisals must be adjusted
to recognize the fade in market value. In estimating its allowance for loan and lease losses on
collateral dependent loans using outdated appraisals, Doral uses the original appraisal as adjusted
for the estimated fade in property value less selling costs to
48
estimate the current fair value of
the collateral. That current adjusted estimated fair value is then compared to the reported
investment, and if the adjusted fair value is less than reported investment, that amount is
included in the allowance for loan and lease loss estimate.
Residential development construction loans that are collateral dependent present unique challenges
to estimating the fair value of
the underlying collateral. Residential development construction loans are partially completed with
additional construction costs to be incurred, have units being sold and released from the
construction loan, and may have additional land collateralizing the loan on which the developer
hopes or expects to build additional units. Therefore, the value of the collateral is regularly
changing and any appraisal has a limited useful life. Doral uses an internally developed estimate
of value that considers Dorals exit strategy of foreclosing and completing the construction
started and selling the individual units constructed for residential buildings, and separately uses
the most recent appraised value for any remnant land adjusted for the fade in value since the
appraisal date as described above. This internally developed estimate is prepared in conjunction
with a third party servicer of the portfolio who validates and determines the inputs used to arrive
at the estimate of value (e.g. units sold, expected sales, cost to complete, etc.)
Once third party appraisals are obtained, the previously estimated property values are updated with
the actual values reflected in the appraisals and any additional loss incurred is recognized in the
period when the appraisal is received. The internally developed collateral price index is also
updated and any changes resulting from the update in the index are also recognized in the period.
Following is a description of valuation methodologies used for financial instruments recorded at
fair value, including the general classification of such instruments pursuant to the valuation
hierarchy.
Securities held for trading: Securities held for trading are reported at fair value and consist
primarily of securities and derivatives held for trading purposes. The valuation method for trading
securities is the same as the methodology used for securities classified as Available for Sale. The
valuation methodology for IOs (Level 3) and derivatives (Level 2) are described in the Servicing
assets and interest-only strips, and Derivatives sections, respectively.
For residual CMO certificates included in trading securities, the Company uses a cash flow model to
value the securities. Doral utilizes the collaterals statistics available on Bloomberg such as
forecasted prepayment speed, weighted-average remaining maturity, weighted-average coupon and age.
Based on Bloomberg information, the Company forecasts the cash flows and then discounts it at the
discount rate used for the period. For purposes of discounting, the Company uses the same Z-spread
methodology used for the valuations of Dorals floating rate IOs.
Securities available for sale: Securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices
are not available, fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted for the securitys
credit rating, prepayment assumptions and other factors such as credit loss assumptions, expected
defaults and loss severity. Level 1 securities (held for trading) include those securities that are
traded by dealers or brokers in active over-the-counter markets. Level 2 securities include agency
CMOs, municipal bonds, and agency MBS. Level 3 securities include non-agency and agency CMOs for
which quoted market prices are not available. For determining the fair value of Level 3 securities
available for sale, the Company uses a valuation model that calculates the present value of
estimated future cash flows. The model incorporates the Companys own estimates of assumptions
market participants use in determining the fair value, including prepayment speeds, loss
assumptions and discount rates.
Loans held for sale: Loans held for sale are carried at the lower of net cost or market value on an
aggregate portfolio basis. The amount by which cost exceeds market value, if any, is accounted for
as a loss through a valuation allowance. Loans held for sale consist primarily of mortgage loans.
The market value of mortgage loans held for sale is generally based on quoted market prices for MBS
adjusted to reflect particular characteristics of the asset such as guarantee fees, servicing fees,
actual delinquency and credit risk. Loans held for sale are classified as Level 2, except for loans
where management makes certain adjustments to the model based on unobservable inputs that are
significant. These loans are classified as Level 3. Loans held for sale were carried at cost as of
June 30, 2011.
Loans receivable: Loans receivable are those held principally for investment purposes. These
consist of construction loans for new housing development, certain residential mortgage loans which
the Company does not expect to sell in the near future, commercial real estate, commercial and
industrial, leases, land, and consumer loans. Loans receivable are carried at their unpaid
principal balance, less unearned interest, net of deferred loan fees or costs (including premiums
and discounts), undisbursed portion of construction loans and an allowance for loan and lease
losses. Loans receivable include collateral dependent loans for which the repayment of the loan is
expected to be provided solely by the underlying collateral. The Company does not record loans
receivable at fair value on a recurring basis. However, from time to time, the Company records
nonrecurring fair value adjustments to collateral dependent loans to reflect (i) partial
write-downs that are based on the fair value of the collateral, or (ii) the full charge-off of the
loan carrying value. The fair value of the collateral is mainly derived from
appraisals that take
into
49
consideration prices in observed transactions involving similar assets in similar locations.
The Company classifies loans receivable subject to nonrecurring fair value adjustments as Level 3.
For the fair value of loans receivable, not reported at fair value loans are classified by type
such as, residential mortgage loans, commercial real estate, commercial and industrial, leases,
land, and consumer loans. The fair value of residential mortgage loans is based on quoted market
prices for MBS adjusted by particular characteristics like guarantee fees, servicing fees, actual
delinquency and the credit risk associated to the individual loans. For the syndicated commercial
loans, the Company engages a third party specialist to assist with its valuation. The fair value of
syndicated commercial loans is determined based on market information on trading activity. For all
other loans, the fair value is estimated using discounted cash flow analyses, based on LIBOR and
with adjustments that the Company believes a market participant would consider in determining fair
value for like assets.
Servicing assets and interest-only strips: The Company routinely originates, securitizes and sells
mortgage loans into the secondary market. As a result of this process, the Company typically
retains the servicing rights and, in the past, also retained IOs. Servicing assets retained in a
sale or securitization arise from contractual agreements between the Company and investors in
mortgage securities and mortgage loans. The Company records mortgage servicing assets at fair value
on a recurring basis. Considerable judgment is required to determine the fair value of the
Companys servicing assets. Unlike highly liquid investments, the market value of servicing assets
cannot be readily determined because these assets are not actively traded in securities markets.
The fair value of the servicing assets is determined based on a combination of market information
on trading activity (servicing asset trades and broker valuations), benchmarking of servicing
assets (valuation surveys) and cash flow modeling. The valuation of the Companys servicing assets
incorporates two sets of assumptions: (i) market derived assumptions for discount rates, servicing
costs, escrow earnings rate, float earnings rate and cost of funds and (ii) market derived
assumptions adjusted for the Companys loan characteristics and portfolio behavior for escrow
balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties. For IOs
the Company uses a valuation model that calculates the present value of estimated future cash
flows. The model incorporates the Companys own estimates of assumptions market participants use in
determining the fair value, including estimates of prepayment speeds, discount rates, defaults and
contractual fee income. IOs are recorded as securities held for trading. Fair value measurements of
servicing assets and IOs use significant unobservable inputs and, accordingly, are classified as
Level 3.
Real estate held for sale: The Company acquires real estate through foreclosure proceedings. These
properties are held for sale and are stated at the lower of cost or fair value (after deduction of
estimated disposition costs). A loss is recognized for any initial write down to fair value less
costs to sell. The fair value of the properties is derived from appraisals that take into
consideration prices in observed transactions involving similar assets in similar locations but
adjusted for specific characteristics and assumptions of the properties, which are not market
observable. The Company records nonrecurring fair value adjustments to reflect any losses in the
carrying value arising from periodic appraisals of the properties charged to expense in the period
incurred. The Company classifies real estate held for sale subject to nonrecurring fair value
adjustments as Level 3.
Other assets: The Company may be required to record certain assets at fair value on a nonrecurring
basis. These assets include premises and equipment, goodwill, and certain assets that are part of
CB, LLC. CB, LLC is an entity formed to manage a residential real estate project that Doral Bank PR
received in lieu of foreclosure. Fair value measurements of these assets use significant
unobservable inputs and, accordingly, are classified as Level 3.
|
|
Premises and equipment: Premises and equipment are carried at cost. However, whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable,
the Company recognizes an impairment loss based on the fair value of the property, which is
generally obtained from appraisals. Property impairment losses are recorded as part of
occupancy expenses in the Consolidated Statement of Operations. |
|
|
Goodwill: Goodwill is not amortized, but is tested for impairment at least annually or more
frequently if events or circumstances indicate possible impairment. In determining the fair
value of a reporting unit the Company uses discounted cash flow analysis. Goodwill impairment
losses are recorded as part of other expenses in the Consolidated Statement of Operations. |
|
|
CB, LLC: Events or changes in circumstances may indicate that the carrying amount of certain
assets may not be recoverable, such as for land and the remaining housing units. Impairment
losses are recorded as part of occupancy expenses in the Consolidated Statement of Operations. |
50
Derivatives: Substantially all of the Companys derivatives are traded in over-the-counter markets
where quoted market prices are not readily available. For those derivatives, Doral Financial
measures fair value using internally developed models that use primarily market observable inputs,
such as yield curves and volatility surfaces.
The non-performance risk is evaluated internally considering collateral held, remaining term and
the creditworthiness of the entity that bears the risk. These derivatives are classified as Level
2. Level 2 derivatives consist of interest rate swaps and interest rate caps.
Following is a description of valuation methodologies used for instruments not recorded at fair
value.
Cash and due from banks and other interest-earning assets: Valued at the carrying amounts in the
Consolidated Statements of Financial Condition. The carrying amounts are reasonable estimates of
fair value due to the relatively short period to maturity.
Deposits: Fair value is calculated considering the discounted cash flows based on brokered
certificates of deposits curve and internally generated decay assumptions.
Loans payable: These loans represent secured lending arrangements with local financial institutions
that are generally floating rate instruments, and therefore their fair value has been determined to
be par.
Notes payable, advances from FHLB, other short-term borrowings and securities sold under agreements
to repurchase: Valued utilizing discounted cash flow analysis over the remaining term of the
obligation using market rates for similar instruments.
Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the balance of assets and liabilities measured at fair value on a
recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(In thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held for Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
$ |
830 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
830 |
|
|
$ |
766 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
766 |
|
IOs |
|
|
43,750 |
|
|
|
|
|
|
|
|
|
|
|
43,750 |
|
|
|
44,250 |
|
|
|
|
|
|
|
|
|
|
|
44,250 |
|
Derivatives |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Held for
Trading |
|
|
44,589 |
|
|
|
|
|
|
|
9 |
|
|
|
44,580 |
|
|
|
45,029 |
|
|
|
|
|
|
|
13 |
|
|
|
45,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS |
|
|
446,956 |
|
|
|
|
|
|
|
445,288 |
|
|
|
1,668 |
|
|
|
1,142,973 |
|
|
|
|
|
|
|
1,141,281 |
|
|
|
1,692 |
|
CMO Government Sponsored Agencies |
|
|
109,630 |
|
|
|
|
|
|
|
102,347 |
|
|
|
7,283 |
|
|
|
312,831 |
|
|
|
|
|
|
|
305,442 |
|
|
|
7,389 |
|
Non-Agency CMOs |
|
|
7,960 |
|
|
|
|
|
|
|
|
|
|
|
7,960 |
|
|
|
7,192 |
|
|
|
|
|
|
|
|
|
|
|
7,192 |
|
Obligations U.S. Government Sponsored
Agencies |
|
|
94,982 |
|
|
|
|
|
|
|
94,982 |
|
|
|
|
|
|
|
34,992 |
|
|
|
|
|
|
|
34,992 |
|
|
|
|
|
Other |
|
|
11,923 |
|
|
|
|
|
|
|
|
|
|
|
11,923 |
|
|
|
7,077 |
|
|
|
|
|
|
|
|
|
|
|
7,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Available
for Sale |
|
|
671,451 |
|
|
|
|
|
|
|
642,617 |
|
|
|
28,834 |
|
|
|
1,505,065 |
|
|
|
|
|
|
|
1,481,715 |
|
|
|
23,350 |
|
Servicing Assets |
|
|
115,785 |
|
|
|
|
|
|
|
|
|
|
|
115,785 |
|
|
|
114,342 |
|
|
|
|
|
|
|
|
|
|
|
114,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
831,825 |
|
|
$ |
|
|
|
$ |
642,626 |
|
|
$ |
189,199 |
|
|
$ |
1,664,436 |
|
|
$ |
|
|
|
$ |
1,481,728 |
|
|
$ |
182,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (1) |
|
$ |
3,435 |
|
|
$ |
|
|
|
$ |
3,435 |
|
|
$ |
|
|
|
$ |
5,418 |
|
|
$ |
|
|
|
$ |
5,418 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Forward contracts and interest rate swaps included as part of accrued expenses and
other liabilities in the consolidated statements of financial condition. |
51
The changes in Level 3 of assets and liabilities for the quarters and six month periods ended
June 30, 2011 and June 30, 2010, measured at fair value on a recurring basis are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair |
|
|
of servicing |
|
|
Net gains |
|
|
repayments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value |
|
|
assets |
|
|
included in |
|
|
and |
|
|
|
|
|
|
|
|
|
|
Balance, |
|
|
included in |
|
|
included in |
|
|
other |
|
|
amortization |
|
|
|
|
|
|
|
|
|
|
beginning of |
|
|
the Statement |
|
|
the Statement |
|
|
comprehensive |
|
|
of premium |
|
|
|
|
|
|
Balance, end |
|
(In thousands) |
|
quarter |
|
|
of Operations |
|
|
of Operations |
|
|
income |
|
|
and discount (4) |
|
|
Purchases |
|
|
of quarter |
|
Securities held for trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
$ |
805 |
|
|
$ |
25 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
830 |
|
IOs (1) |
|
|
41,618 |
|
|
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held for
trading |
|
|
42,423 |
|
|
|
2,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS |
|
|
1,682 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
(26 |
) |
|
|
|
|
|
|
1,668 |
|
CMO Government Sponsored Agencies |
|
|
7,336 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
(63 |
) |
|
|
|
|
|
|
7,283 |
|
Non-Agency CMOs |
|
|
7,753 |
|
|
|
(86 |
) |
|
|
|
|
|
|
216 |
|
|
|
77 |
|
|
|
|
|
|
|
7,960 |
|
Other |
|
|
11,876 |
|
|
|
|
|
|
|
|
|
|
|
187 |
|
|
|
(140 |
) |
|
|
|
|
|
|
11,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for
sale |
|
|
28,647 |
|
|
|
(86 |
) |
|
|
|
|
|
|
425 |
|
|
|
(152 |
) |
|
|
|
|
|
|
28,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing Assets (3) |
|
|
116,299 |
|
|
|
(3,059 |
) |
|
|
2,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of
period |
|
$ |
187,369 |
|
|
$ |
(988 |
) |
|
$ |
2,545 |
|
|
$ |
425 |
|
|
$ |
(152 |
) |
|
$ |
|
|
|
$ |
189,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair |
|
|
of servicing |
|
|
Net gains (losses) |
|
|
repayments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value |
|
|
assets |
|
|
included in |
|
|
and |
|
|
|
|
|
|
|
|
|
|
Balance, |
|
|
included in |
|
|
included in |
|
|
other |
|
|
amortization |
|
|
|
|
|
|
|
|
|
|
beginning of |
|
|
the Statement |
|
|
the Statement |
|
|
comprehensive |
|
|
of premium |
|
|
|
|
|
|
Balance, end |
|
(In thousands) |
|
quarter |
|
|
of Operations |
|
|
of Operations |
|
|
income |
|
|
and discount (4) |
|
|
Purchases |
|
|
of quarter |
|
Securities held for trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS |
|
$ |
796 |
|
|
$ |
36 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
832 |
|
IOs (1) |
|
|
43,584 |
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held for
trading |
|
|
44,380 |
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,544 |
|
|
Securities available for sale (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS |
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
1,763 |
|
CMO Government Sponsored Agencies |
|
|
8,194 |
|
|
|
|
|
|
|
|
|
|
|
(349 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
7,780 |
|
Non-Agency CMOs |
|
|
261,129 |
|
|
|
|
|
|
|
|
|
|
|
129,634 |
|
|
|
(383,268 |
) |
|
|
|
|
|
|
7,495 |
|
Other |
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
272,921 |
|
|
|
|
|
|
|
|
|
|
|
129,265 |
|
|
|
(383,333 |
) |
|
|
|
|
|
|
18,853 |
|
|
Servicing Assets (3) |
|
|
118,236 |
|
|
|
(6,475 |
) |
|
|
1,406 |
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
|
|
113,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of
period |
|
$ |
435,537 |
|
|
$ |
(5,311 |
) |
|
$ |
1,406 |
|
|
$ |
129,265 |
|
|
$ |
(383,333 |
) |
|
$ |
(162 |
) |
|
$ |
177,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in fair value are recognized in net gain on trading activities in
non-interest income and the amortization of the IOs is recognized in interest income on
interest-only strips. For the quarter ended June 30, 2011, the IO had a gain of $4.1 million
for change in fair value and an amortization of $2.0 million. For the quarter ended June 30,
2010, the IO had a gain of $3.8 million for change in fair value and an amortization of $2.7
million. |
|
(2) |
|
OTTI is recognized as part of non-interest income. Amortization of premium and
discount is recognized as part of interest income as mortgage-backed securities. |
|
(3) |
|
Change in fair value of servicing assets is recognized in non-interest income as
servicing income. Capitalization of servicing assets is recognized in non-interest income as
net gain on mortgage loan sales and fees. |
|
(4) |
|
Amortization of premium and discount of $108,000 and $489,000 for the quarters ended
June 30, 2011 and 2010, respectively is recognized within interest income from MBS in the
consolidated financial statements. |
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month period ended June 30, 2011 |
|
|
|
|
|
|
|
Change in fair |
|
|
Capitalization of |
|
|
Net gains |
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value included |
|
|
servicing assets |
|
|
included in |
|
|
repayments and |
|
|
|
|
|
|
|
|
|
|
Balance, |
|
|
in the |
|
|
included in the |
|
|
other |
|
|
amortization of |
|
|
|
|
|
|
|
|
|
|
beginning of |
|
|
Statement of |
|
|
Statement of |
|
|
comprehensive |
|
|
premium and |
|
|
|
|
|
|
Balance, end |
|
|
|
year |
|
|
Operations |
|
|
Operations |
|
|
income |
|
|
discount (4) |
|
|
Purchases |
|
|
of year |
|
Securities available for trading
MBS |
|
$ |
766 |
|
|
$ |
64 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
830 |
|
IOs(1) |
|
|
44,250 |
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held for trading |
|
|
45,016 |
|
|
|
(436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale (2)
Agency MBS |
|
|
1,692 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
(50 |
) |
|
|
|
|
|
|
1,668 |
|
CMO Government Sponsored Agencies |
|
|
7,389 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
(134 |
) |
|
|
|
|
|
|
7,283 |
|
Non-Agency CMOs |
|
|
7,192 |
|
|
|
(86 |
) |
|
|
|
|
|
|
724 |
|
|
|
130 |
|
|
|
|
|
|
|
7,960 |
|
Other |
|
|
7,077 |
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
(360 |
) |
|
|
5,002 |
|
|
|
11,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
23,350 |
|
|
|
(86 |
) |
|
|
|
|
|
|
982 |
|
|
|
(414 |
) |
|
|
5,002 |
|
|
|
28,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing Assets (3) |
|
|
114,342 |
|
|
|
(3,199 |
) |
|
|
4,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
182,708 |
|
|
$ |
(3,721 |
) |
|
$ |
4,642 |
|
|
$ |
982 |
|
|
$ |
(414 |
) |
|
$ |
5,002 |
|
|
$ |
189,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month period ended June 30, 2010 |
|
|
|
|
|
|
|
Change in fair |
|
|
Capitalization of |
|
|
Net gains |
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value included |
|
|
servicing assets |
|
|
included in |
|
|
repayments and |
|
|
|
|
|
|
|
|
|
|
Balance, |
|
|
in the |
|
|
included in the |
|
|
other |
|
|
amortization of |
|
|
|
|
|
|
|
|
|
|
beginning of |
|
|
Statement of |
|
|
Statement of |
|
|
comprehensive |
|
|
premium and |
|
|
|
|
|
|
Balance, end |
|
|
|
year |
|
|
Operations |
|
|
Operations |
|
|
income |
|
|
discount (4) |
|
|
Purchases |
|
|
of year |
|
Securities available for trading
MBS |
|
$ |
893 |
|
|
$ |
(61 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
832 |
|
IOs (1) |
|
|
45,723 |
|
|
|
(1,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held for trading |
|
|
46,616 |
|
|
|
(1,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale (2)
Agency MBS |
|
|
1,830 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
(99 |
) |
|
|
|
|
|
|
1,763 |
|
CMO Government Sponsored Agencies |
|
|
7,701 |
|
|
|
|
|
|
|
|
|
|
|
230 |
|
|
|
(151 |
) |
|
|
|
|
|
|
7,780 |
|
Non-Agency CMOs |
|
|
270,600 |
|
|
|
(13,259 |
) |
|
|
|
|
|
|
143,507 |
|
|
|
(393,353 |
) |
|
|
|
|
|
|
7,495 |
|
Other |
|
|
1,650 |
|
|
|
|
|
|
|
|
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
281,781 |
|
|
|
(13,259 |
) |
|
|
|
|
|
|
143,934 |
|
|
|
(393,603 |
) |
|
|
|
|
|
|
18,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing Assets (3) |
|
|
118,493 |
|
|
|
(8,478 |
) |
|
|
3,183 |
|
|
|
|
|
|
|
|
|
|
|
(193 |
) |
|
|
113,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
446,890 |
|
|
$ |
(22,809 |
) |
|
$ |
3,183 |
|
|
$ |
143,934 |
|
|
$ |
(393,603 |
) |
|
$ |
(193 |
) |
|
$ |
177,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in fair value are recognized in net gain on trading activities in
non-interest income and the amortization of the IOs is recognized in interest income on
interest-only strips. For the period ended June 30, 2011, the IO had a gain of $3.6 million
for change in fair value and an amortization of $4.1 million. For the period ended June 30,
2010, the IO had a gain of $4.5 million for change in fair value and an amortization of $5.5
million. |
|
(2) |
|
OTTI is recognized as part of non-interest income. Amortization of premium and
discount is recognized as part of interest income as mortgage-backed securities. |
|
(3) |
|
Change in fair value of servicing assets is recognized in non-interest income as
servicing income. Capitalization of servicing assets is recognized in non-interest income as
net gain on mortgage loan sales and fees. |
|
(4) |
|
Amortization of premium and discount of $172,000 and $0.1 million for the periods
ended June 30, 2011 and 2010, respectively is recognized within interest income from MBS in
the consolidated financial statements. |
53
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from
application of lower-of-cost-or-market accounting or write-downs of individual assets. The
valuation methodologies used to measure these fair value adjustments are described above. For
assets measured at fair value on a nonrecurring basis during the six month period ended June 30,
2011, that were still held on the balance sheet at June 30, 2011, the following table provides the
level of valuation assumptions used to determine each adjustment and the carrying value of the
related individual assets or portfolios at period end.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Carrying Value |
|
|
Level 3 |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
Loans receivable (1) |
|
$ |
158,590 |
|
|
$ |
158,590 |
|
Real estate held for sale (2) |
|
$ |
37,507 |
|
|
$ |
37,507 |
|
|
|
|
|
|
|
|
Total |
|
|
196,097 |
|
|
|
196,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
Loans receivable (1) |
|
$ |
266,093 |
|
|
$ |
266,093 |
|
Real estate held for sale (2) |
|
|
70,335 |
|
|
|
70,335 |
|
Other assets (3) |
|
|
2,275 |
|
|
|
2,275 |
|
|
|
|
|
|
|
|
Total |
|
$ |
338,703 |
|
|
$ |
338,703 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the carrying value of collateral dependent loans for which adjustments
are based on the appraised value of the collateral. |
|
(2) |
|
Represents the carrying value of real estate held for sale for which adjustments are
based on the appraised value of the properties. |
|
(3) |
|
Represents the carrying value of CB, LLC assets for which adjustments are based on
the appraised value of land and the remaining housing units. |
The following table summarizes total losses relating to assets (classified as level 3) held at the reporting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the quarters ended |
|
Loss for the six month periods |
|
|
Location of Loss Recognized in the |
|
June 30, |
|
ended June 30, |
(In thousands) |
|
Statement of Operations |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Loans receivable
|
|
Provision for loan and lease losses |
|
$ |
8,411 |
|
|
$ |
4,284 |
|
|
$ |
5,789 |
|
|
$ |
20,335 |
|
Real estate held
for sale |
|
Other expenses |
|
$ |
1,945 |
|
|
$ |
27,980 |
|
|
$ |
6,493 |
|
|
$ |
32,429 |
|
54
Disclosures about Fair Value of Financial Instruments
The following table discloses the carrying amounts of financial instruments and their estimated
fair values as of June 30, 2011 and December 31, 2010. The amounts in the disclosure have not been
updated since quarter end, therefore, the valuations may have changed significantly since that
point in time. Accordingly, the estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methods may have a material effect in the estimated fair value
amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
|
|
Carrying |
|
|
|
|
|
Carrying |
|
|
(In thousands) |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
562,397 |
|
|
$ |
562,397 |
|
|
$ |
355,819 |
|
|
$ |
355,819 |
|
Other interest-earning assets |
|
|
43,967 |
|
|
|
43,967 |
|
|
|
156,607 |
|
|
|
156,607 |
|
Securities held for trading (1) |
|
|
44,589 |
|
|
|
44,589 |
|
|
|
45,029 |
|
|
|
45,029 |
|
Securities available for sale |
|
|
671,451 |
|
|
|
671,451 |
|
|
|
1,505,065 |
|
|
|
1,505,065 |
|
Loans held for sale (2) |
|
|
301,934 |
|
|
|
308,715 |
|
|
|
319,269 |
|
|
|
325,655 |
|
Loans receivable |
|
|
5,595,126 |
|
|
|
5,357,922 |
|
|
|
5,464,919 |
|
|
|
5,179,879 |
|
Servicing assets |
|
|
115,785 |
|
|
|
115,785 |
|
|
|
114,342 |
|
|
|
114,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
4,302,792 |
|
|
$ |
4,361,116 |
|
|
$ |
4,618,475 |
|
|
$ |
4,685,730 |
|
Securities sold under agreements to repurchase |
|
|
442,300 |
|
|
|
458,706 |
|
|
|
1,176,800 |
|
|
|
1,218,280 |
|
Advances from FHLB |
|
|
1,342,849 |
|
|
|
1,421,846 |
|
|
|
901,420 |
|
|
|
923,266 |
|
Loans payable |
|
|
294,623 |
|
|
|
294,623 |
|
|
|
304,035 |
|
|
|
304,035 |
|
Notes payable |
|
|
510,430 |
|
|
|
481,915 |
|
|
|
513,958 |
|
|
|
482,441 |
|
Derivatives (3) |
|
|
3,435 |
|
|
|
3,435 |
|
|
|
5,418 |
|
|
|
5,418 |
|
|
|
|
(1) |
|
Includes derivatives of $9,000 and $13,000 for June 30, 2011 and December 31, 2010,
respectively. |
|
(2) |
|
Includes $148.1 million and $153.4 million for June 30, 2011 and December 31, 2010,
respectively, related to GNMA defaulted loans for which the Company has an unconditional
buy-back option. |
|
(3) |
|
Includes $53,000 and $0.7 million of derivatives held for trading purposes and $3.4
million and $4.7 million of derivatives held for purposes other than trading, for June 30,
2011 and December 31, 2010, respectively, as part of accrued expenses and other liabilities in
the Consolidated Statement of Financial Condition. |
55
29. Derivatives
Doral Financial uses derivatives to manage its exposure to interest rate risk. The Company
maintains an overall interest rate risk-management strategy that incorporates the use of derivative
instruments to minimize significant unplanned fluctuations in earnings that are caused by interest
rate changes. Derivatives include interest rate swaps, interest rate caps and forward contracts.
The Companys goal is to manage interest rate sensitivity by modifying the repricing or maturity
characteristics of certain balance sheet assets and liabilities so that net interest margin is not,
on a material basis, adversely affected by movements in interest rates.
Doral Financial accounts for derivatives on a marked-to-market basis with gains or losses charged
to operations as they occur. The fair value of derivatives is generally reported net by
counterparty. The fair value of derivatives accounted as hedges is also reported net of accrued
interest and included in other liabilities in the Consolidated Statement of Financial Position.
Derivatives not accounted as hedges in a net asset position are recorded as securities held for
trading and derivatives in a net liability position as other liabilities in the Consolidated
Statement of Financial Position.
As of June 30, 2011 and December 31, 2010, the Company had the following derivative financial
instruments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Notional |
|
|
Fair Value |
|
|
Notional |
|
|
Fair Value |
|
(In thousands) |
|
Amount |
|
|
Asset |
|
|
Liability |
|
|
Amount |
|
|
Asset |
|
|
Liability |
|
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
74,000 |
|
|
$ |
|
|
|
$ |
(3,382 |
) |
|
$ |
74,000 |
|
|
$ |
|
|
|
$ |
(4,677 |
) |
Other Derivatives (non hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
|
210,000 |
|
|
|
1 |
|
|
|
|
|
|
|
210,000 |
|
|
|
13 |
|
|
|
|
|
Forward contracts |
|
|
55,000 |
|
|
|
8 |
|
|
|
(53 |
) |
|
|
100,000 |
|
|
|
|
|
|
|
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
339,000 |
|
|
$ |
9 |
|
|
$ |
(3,435 |
) |
|
$ |
384,000 |
|
|
$ |
13 |
|
|
$ |
(5,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
As of both June 30, 2011 and December 31, 2010, the Company had $74.0 million outstanding pay fixed
interest rate swaps designated as cash flow hedges with maturities between September 2011 and
November 2012. The Company designated the pay fixed interest rate swaps to hedge the variability of
future interest cash flows of adjustable rate advances from FHLB. For the quarter and six month
periods ended June 30, 2011 and 2010, the Company did not realized ineffectiveness for the
interest rate swaps designated as cash flow hedges. As of June 30, 2011 and 2010, accumulated
other comprehensive income included unrealized losses on cash flow hedges of $2.0 million and $4.5
million, respectively, of which the Company expects to reclassify approximately $2.5 million and
$3.9 million, respectively, against earnings during the next twelve months.
Doral Financials interest rate swaps had weighted average receive rates of 0.21% and 0.29% and
weighted average pay rates of 4.60% at June 30, 2011 and December 31, 2010, respectively.
56
The table below presents the location and effect of cash flow derivatives on the Companys results
of operations and financial condition for the quarters ended June 30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Reclassified |
|
|
|
Reclassified from |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
from Accumulated |
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
Other |
|
|
Other |
|
|
|
Comprehensive |
|
Notional |
|
|
|
|
|
|
Comprehensive |
|
|
Comprehensive |
|
(In thousands) |
|
Income to Income |
|
Amount |
|
|
Fair Value |
|
|
Income |
|
|
Income to Income |
|
Cash flow Hedges
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Interest expense Advances from FHLB |
|
$ |
74,000 |
|
|
$ |
(3,382 |
) |
|
$ |
554 |
|
|
$ |
(825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Interest expense Advances from FHLB |
|
$ |
305,000 |
|
|
$ |
(7,511 |
) |
|
$ |
1,594 |
|
|
$ |
(2,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents the location and effect of cash flow derivatives on the Companys
results of operations and financial condition for the six month periods ended June 30, 2011 and
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified from |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Reclassified |
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
from Accumulated |
|
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
Other |
|
|
Other |
|
|
|
Income to |
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
Comprehensive |
|
(In thousands) |
|
Income |
|
Notional Amount |
|
|
Fair Value |
|
|
Income |
|
|
Income to Income |
|
Cash flow Hedges
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Interest expense Advances from FHLB |
|
$ |
74,000 |
|
|
$ |
(3,382 |
) |
|
$ |
1,287 |
|
|
$ |
(1,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Interest expense Advances from FHLB |
|
$ |
305,000 |
|
|
$ |
(7,511 |
) |
|
$ |
3,152 |
|
|
$ |
(3,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Trading and Non-Hedging Activities
The following table summarizes the total derivatives positions at June 30, 2011 and 2010,
respectively, and their different designations. Also, includes net gains (losses) on derivative
positions for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
Location of Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in the |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss for the |
|
|
|
Consolidated Statement of |
|
Notional |
|
|
|
|
|
|
Net Loss for the |
|
|
Six Month |
|
(In thousands) |
|
Operations |
|
Amount |
|
|
Fair Value |
|
|
Quarter |
|
|
Period |
|
Derivatives not designated as
cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
Net gain (loss) on trading activities |
|
$ |
210,000 |
|
|
$ |
1 |
|
|
$ |
(2 |
) |
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
Net gain (loss) on trading activities |
|
|
55,000 |
|
|
|
(45 |
) |
|
|
(704 |
) |
|
|
(1,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,000 |
|
|
$ |
(44 |
) |
|
$ |
(706 |
) |
|
$ |
(1,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Location of Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Gain |
|
|
|
Recognized in the Consolidated |
|
Notional |
|
|
|
|
|
|
Net (Loss) Gain |
|
|
for the Six |
|
(In thousands) |
|
Statement of Operations |
|
Amount |
|
|
Fair Value |
|
|
for the Quarter |
|
|
Month Period |
|
Derivatives not designated as
cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
Net gain (loss) on trading activities |
|
$ |
270,000 |
|
|
$ |
53 |
|
|
$ |
(162 |
) |
|
$ |
(723 |
) |
Forward contracts |
|
Net gain (loss) on trading activities |
|
|
135,000 |
|
|
|
2,781 |
|
|
|
3,407 |
|
|
|
4,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
405,000 |
|
|
$ |
2,834 |
|
|
$ |
3,245 |
|
|
$ |
3,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial held $265.0 million and $310.0 million in notional value of derivatives not
designated as hedges at June 30, 2011 and December 31, 2010, respectively.
The Company purchases interest rate caps to manage its interest rate exposure. Interest rate cap
agreements generally involve purchases of out of the money caps to protect the Company from adverse
effects from rising interest rates. These products are not linked to specific assets and
liabilities that appear on the balance sheet or to a forecasted transaction and, therefore, do not
qualify for hedge accounting. As of June 30, 2011 and December 31, 2010, the Company had
outstanding interest rate caps with a notional amount of $210.0 million, respectively.
The Company enters into forward contracts to create an economic hedge on its mortgage warehouse
line and on its MSR. The notional amount of the forward contract used to create an economic hedge
on its MSR as of June 30, 2011 and 2010 was $25.0 million and $100.0 million, respectively. As of
June 30, 2011 and 2010, the Company had forwards hedging its warehousing line with a notional
amount of $30.0 million and $35.0 million, respectively. As of December 31, 2010, the Company had a
notional amount of $50.0 million of forward contracts used to create an economic hedge on its MSR
and a notional amount of $50.0 million of forwards hedging its warehousing line. For the quarter
and six month periods ended June 30, 2011, the Company recorded losses of $0.7 million and $1.3
million, respectively, on forward contracts which included gains of
$0.6 million and $59,000,
respectively, related to the economic hedge on the MSR. For the quarter and six month periods ended
June 30, 2010, the Company recorded gains of $3.4 million and $4.3 million, respectively, on
forward contracts which included gains of $4.7 million and $6.5 million, respectively, related to
the economic hedge on the MSR.
Credit risk related to derivatives arises when amounts receivable from counterparty exceed those
payable. Because the notional amount of the instruments only serves as a basis for calculating
amounts receivable or payable, the risk of loss with any counterparty is limited to a small
fraction of the notional amount. Doral Financials maximum loss related to credit risk is equal to
the gross fair value of its derivative instruments. Doral Financial deals only with derivative
dealers that are national market makers with strong credit ratings in their derivatives activities.
The Company further controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit. In addition,
counterparties are required to provide cash collateral to Doral Financial when their unsecured loss
positions exceed certain negotiated limits.
58
All derivative contracts to which Doral Financial is a party settle monthly, quarterly or
semiannually. Further, Doral Financial has netting agreements with the dealers and only does
business with creditworthy dealers. Because of these factors, Doral Financials credit risk
exposure related to derivatives contracts at June 30, 2011 and December 31, 2010 was not considered
material.
30. Variable Interest Entities
In June 2009, the FASB revised authoritative guidance for determining the primary beneficiary of a
variable interest entity (VIE). A VIE is an entity that by design possesses the following
characteristics:
|
|
|
The equity investment at risk is not sufficient for the entity to finance its
activities without additional subordinated financial support. |
|
|
|
|
As a group, the holders of equity investment at risk do not possess: i) the power,
through voting rights or similar rights, to direct the activities that most
significantly impact the entitys economic performance; or ii) the obligation to absorb
expected losses or the right to receive the expected residual returns of the entity; or
iii) symmetry between voting rights and economic interests and where substantially all
of the entitys activities either involve or are conducted on behalf of an investor
with disproportionately fewer voting rights (e.g., structures with nonsubstantive
voting rights). |
These entities are subject to the accounting and disclosure requirements of ASC 810-10-05,
Consolidation-Variable Interest Entities. The Company is required to consolidate any VIEs in which
it is deemed to be the primary beneficiary through having (i) power over the significant activities
of the entity and (ii) having an obligation to absorb losses or the right to receive benefits from
the VIE which are potentially significant to the VIE.
The Company identified four potential sources of variable interests: (i) the servicing portfolio,
(ii) the investment portfolio, (iii) the lending portfolio and (iv) special purpose entities with
which the Company is involved, and performed and assessed each for the existence of VIEs and
determination of possible consolidation requirements. In all instances where the Company identified
a variable interest in a VIE, a primary beneficiary analysis was performed.
Servicing Assets: In the ordinary course of business, the Company transfers financial assets (whole
loan sales/securitizations) in which it has retained the right to service the assets. The servicing
portfolio was considered a potential source of variable interest and was analyzed to determine if
any VIEs required consolidation. The servicing portfolio was grouped into three segments:
government sponsored entities (GSEs), governmental agencies and private investors. Except for two
private investors (further analyzed as investment securities below), the Company concluded that the
servicing fee received from providing this service did not represent a variable interest as defined
by this guidance. The Company determined that its involvement with these entities is in the
ordinary course of business and the criteria established to consider the servicing activities as
those of a service provider (fiduciary in nature) and not a decision maker, were met.
Investment Securities: The Company analyzed its investment portfolio and determined that it had
several residual interests in non-agency CMOs that required full analysis to determine the primary
beneficiary. For trading assets and insignificant residual interests as well as investments in
non-profit vehicles, the Company determined that it was not the primary beneficiary since it does
not have power over the significant activities of the entity. For two residual interests in
non-agency CMOs where the Company is also the servicer of the underlying assets it was determined
that due to: (i) the unilateral ability of the issuers to remove the Company from its role as
servicer, or role of servicer for loans more than 90 days past due; (ii) the issuers right to
object to commencement of the foreclosure procedures; and (iii) the requirement for issuer
authorization of the sales price of all foreclosed property; the Company did not have power over
the significant activities of the entity and therefore consolidation was not appropriate.
Loans: Through its construction portfolio, the Company provides financing to legal entities created
with the limited purpose of developing and selling residential or commercial properties. Often
these entities do not have sufficient equity investment at risk to finance its activities, and the
Company could potentially have a variable interest in the entities since it may absorb losses
related to the loans granted. In situations where the loan defaults or is re-structured by the
Company, the loan could result in the Companys potential absorption of losses of the entity.
However, the Company is not involved in the design or operations of these entities and it has
therefore been concluded that the Company does not have the power over the activities that most
significantly impact the economic performance of the VIEs and is not considered the primary
beneficiary in any of these entities. The Company will continue to assess this portfolio on an
ongoing basis to determine if there are any changes in its involvement with these VIEs that could
potentially lead to consolidation treatment.
59
Special Purpose Entities (SPE): The Company is involved with two special purpose entities. These
special purpose entities are deemed to be VIEs.
|
|
The Company sold an asset portfolio to a third party on July 29, 2010, consisting of
performing and non-performing late-stage residential construction and development loans and
other real estate assets, with carrying amounts at the transfer date of $33.8 million, $63.4
million and $4.8 million, respectively. As consideration for the transferred assets, the
Company received a $5.1 million cash payment and a $96.9 million note receivable which has a
10-year maturity and a fixed interest rate of 8% per annum and permits interest capitalization
for the first 18 months. This financing provided by the Company is secured by a general pledge
of all of the acquiring entitys assets. As of June 30, 2011, the carrying amount of the note
receivable was $96.9 million and is classified in loans receivable in the Consolidated
Statement of Financial Condition. |
|
|
Concurrent with this transaction, the Company provided the acquirer with a $28.0 million
construction line of credit which has a 10- year maturity and a fixed interest rate of 8% per
annum. The line of credit will be used by the acquirer of the assets to provide construction
advances on the transferred loans or to fund construction on foreclosed properties. As of June
30, 2011, the carrying amount of the line of credit is $3.4 million and is classified as loan
receivable in the Consolidated Statement of Financial Condition. |
|
|
The Company has determined that the acquirer is a VIE and that the Company is not its primary
beneficiary. The assets of the acquirer are comprised of the transferred asset portfolio in
addition to $10.2 million of in kind capital contribution provided by a single third party. The
sole equity holder has unconditionally committed to contribute an additional $7.0 million of
capital over the next six years. |
|
|
The primary beneficiary of a VIE is an enterprise that has a controlling financial interest in
the VIE which exists when an enterprise has both the power to direct the activities that most
significantly impact the VIEs economic performance and the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to the VIE. The
rights provided to the Company as creditor are protective in nature. As the Company does not
have the right to manage the loan portfolio, impact foreclosure proceedings, or manage the
construction and sale of the property, the Company does not have power over the activities that
most significantly impact the economic performance of the acquirer. The Companys maximum
exposure to loss from the variable interest entity is limited to the interest and principal
outstanding on the note receivable and the line of credit. Therefore, the Company is not the
primary beneficiary of the VIE. |
|
|
The transfer of the portfolio, consisting of contruction loans and other real estate assets, was
accounted for as a sale. The note receivable was recognized at its initial fair value of $96.9
million. The initial fair value measurement of the note receivable was determined using
discount rate adjustment techniques with significant unobservable (Level 3) inputs. Management
based its fair value estimate using cash flows forecasted considering the initial and future
loan advances, when the various construction project units would be complete, current absorption
rates of new housing in Puerto Rico, and a market interest rate that reflects the estimated
credit risk of the acquirer and the nature of the loan collateral. Doral considered the loans
to be construction loans for the purposed of determining a market rate. |
|
|
During the third quarter of 2010, the Company, through one of its subsidiaries, Doral
Money, entered into a Collateralized Loan Obligation (CLO) arrangement with a third party in
which up to $450.0 million of largely U.S. mainland based commercial loans are pledged to
collateralize AAA rated debt of $250.0 million paying three month LIBOR plus 1.85 percent
issued by Doral CLO I, Ltd. Doral CLO I, Ltd. is a variable interest entity created to hold
the commercial loans and issue the previously noted debt and $200.0 million of subordinated
notes to the Company whereby the Company receives any excess proceeds after payment of the
senior debt interest and other fees and charges specified in the indenture agreement. The
Company also serves as collateral manager of the assets of Doral CLO I, Ltd. Doral CLO I, Ltd.
is consolidated with the Company in these financial statements. |
|
|
A CLO is a securitization where a special purpose entity purchases a pool of assets consisting
of loans and issues multiple tranches of equity or notes to investors. Typically, the asset
manager has the power over the significant decisions of the VIE through its discretion to manage
the assets of the CLO. |
|
|
Doral CLO I, Ltd. is a VIE because it does not have sufficient equity investment at risk and the
subordinated notes provide additional financial support to the structure. Management has
determined that the Company is the primary beneficiary of Doral CLO I, Ltd. because it has a
variable interest in Doral CLO I, Ltd. through both its collateral manager fee and its
obligation to absorb potentially significant losses and the right to receive potentially
significant benefits of the CLO through the subordinated securities held. The most significant
activities of Doral CLO I, Ltd. are those associated with managing the collateral obligations on
a day-to-day basis and, as collateral manager, the Company controls the significant activities
of the VIE. |
60
The classifications of assets and liabilities on the Companys Statement of Financial Condition
associated with our consolidated VIE follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
December 31, 2010 |
Carrying amount |
|
|
|
|
|
|
|
|
Cash and other interest-earning assets |
|
$ |
13,267 |
|
|
$ |
51,828 |
|
Loans receivable |
|
|
438,898 |
|
|
|
401,723 |
|
Allowance for loan and lease losses |
|
|
(1,669 |
) |
|
|
(2,388 |
) |
Other assets |
|
|
9,156 |
|
|
|
9,795 |
|
|
|
|
Total assets |
|
|
459,652 |
|
|
|
460,958 |
|
|
|
|
|
|
|
|
|
|
Notes payable (third party liability) |
|
|
249,831 |
|
|
|
249,822 |
|
Other liabilities |
|
|
1,721 |
|
|
|
2,934 |
|
|
|
|
Total liabilities |
|
|
251,552 |
|
|
|
252,756 |
|
|
|
|
Net assets |
|
$ |
208,100 |
|
|
$ |
208,202 |
|
|
|
|
The following table summarizes the Companys unconsolidated VIEs and presents the maximum exposure to loss that
would be incurred under severe, hypothetical circumstances, for which the possibility of occurrence is remote, for the
periods indicated.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
December 31, 2010 |
Carrying amount |
|
|
|
|
|
|
|
|
Servicing assets |
|
$ |
14,849 |
|
|
$ |
15,201 |
|
Available for sale securities: |
|
|
|
|
|
|
|
|
Non-agency CMO |
|
|
11,153 |
|
|
|
11,108 |
|
Loans receivable: |
|
|
|
|
|
|
|
|
Construction
and land (3)(4) |
|
|
359,063 |
|
|
|
412,352 |
|
Maximum exposure to loss (1) |
|
|
|
|
|
|
|
|
Servicing assets |
|
$ |
14,849 |
|
|
$ |
15,201 |
|
Available for sale securities: |
|
|
|
|
|
|
|
|
Non-agency CMO (2) |
|
|
11,153 |
|
|
|
11,108 |
|
Loans receivable: |
|
|
|
|
|
|
|
|
Construction
and land (3)(4) |
|
|
359,063 |
|
|
|
412,352 |
|
|
|
|
(1) |
|
Maximum exposure to loss is a required disclosure under GAAP and represents
estimated loss that would be incurred under severe, hypothetical circumstances, for which the
possibility of occurrence is remote, such as where the value of our interests and any
associated collateral declines to zero, without any consideration of recovery or offset from
any economic hedges. Accordingly, this required disclosure is not an indication of expected
loss. |
|
(2) |
|
Refers to book value of residual interest from two private placements (Refer to
Investment Securities disclosure above). These transactions are structured without recourse,
so as servicers our exposure is limited to standard representations and warranties as seller
of the loans and responsibilities as servicer of the SPEs assets. |
|
(3) |
|
Does not include construction spot loans and construction development loans to non-developers. |
|
(4) |
|
Net of ALLL of $11.2 million and $25.0 million as of
June 30, 2011 and December 31, 2010, respectively. |
31. Segment Information
The Companys reportable business segments are strategic business units that offer distinctive
products and services that are marketed through different channels. These are managed separately
because of their unique technology, marketing and distribution requirements.
Management determined the reportable segments based upon the Companys organizational structure and
the information provided to the Chief Executive Officer, to the senior management team and, to a
lesser extent, the Board of Directors, management also considered the internal reporting used to
evaluate performance and to assess where to allocate resources. Other factors such as the Companys
organizational chart, nature of the products, distribution channels and the economic
characteristics of the products were also considered in the determination of the reportable
segments.
During 2011, the Company reorganized its reportable segments consistent with its return to
profitability plan. The strategic plan has the objectives of establishing a focused approach for a
turnaround and returning to profitability, and of managing its liquidating portfolios. The Company
now operates in the following four reportable segments:
61
|
|
Puerto Rico This segment is the Companys principal market and includes all mortgage and
retail banking activities in Puerto Rico including loans, deposits and insurance activities.
This segment operates a branch network in Puerto Rico of 34 branches offering a variety of
consumer loan products as well as deposit products and other retail banking services. This
segments primary lending activities have traditionally focused on the origination of
residential mortgage loans in Puerto Rico. |
|
|
United States This segment is the Companys principal source of growth in the current
economic environment. It includes retail banking in the United States through its federal
savings bank subsidiary with branches in New York and Florida. This segment also includes the
Companys middle market syndicated lending unit that is engaged in purchasing participations
in senior credit facilities in the U.S. syndicated leverage loan market and is the primary
source of growth in the Companys loan portfolio. |
|
|
Liquidating Operations This segment manages the Companys liquidating portfolios
comprised primarily of construction and land portfolios (loans and repossessed assets) with
the purpose of maximizing the Companys returns on these assets. There is no expected growth
in the portfolios within this segment except as part of a workout function. |
|
|
Treasury The Companys Treasury function handles its investment portfolio, interest rate
risk management and liquidity position. It also serves as a source of funding for the
Companys other lines of business. |
The accounting policies followed by the segments are generally the same as those described in the
Summary of Significant Accounting Policies described in the Companys Notes to the Consolidated
Financial Statements included in 2010 Annual Report on Form 10-K except for intersegment
allocations. Intersegment entries are made to account for intersegment loans in which segments
with excess liquidity lend cash to segments with a shortage of liquidity. The extent of the
intersegment loans is calculated based on the net assets less allocated equity of each segment.
Intersegment interest income and expense is calculated based on portfolio specifics and market
terms. The Company also allocates administrative expenses (included in the Corporate column in
the table below) proportionally to the four reportable segments based on their individual total
assets after intersegment loans. Income tax expense has not been deducted in the determination of
segment profits.
The following table presents financial information of the four reportable segments as of June 30,
2011 and for the quarter and six month period ended June 30, 2011 with the new reportable segment
structure. Management determined that it was impracticable to change the composition of reportable
segments for earlier periods. Therefore, we have presented below segment information as of and for
the quarter ended June 30, 2011 with the new reportable segment structure as well as comparative
segment information as of and for the quarters and six month periods ended June 30, 2011 and 2010
using the old reportable segment structure.
Prior to 2011, the Company operated in three reportable segments: mortgage banking activities,
banking (including thrift operations) and insurance agency activities. The Companys segment
reporting was organized by legal entity and aggregated by line of business. Legal entities that did
not meet the threshold for separate disclosure were aggregated with other legal entities with
similar lines of business. Management made this determination based on operating decisions
particular to each business line and because each one targeted different customers and required
different strategies. The majority of the Companys operations are conducted in Puerto Rico. The
Company also operates in the mainland United States, principally in the New York City metropolitan
area and since the third quarter of 2010 in Florida.
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidating |
|
|
|
|
|
|
|
|
(In thousands) |
|
Puerto Rico |
|
United States |
|
Treasury |
|
Operations |
|
Corporate |
|
Intersegment (1) |
|
Total |
Net interest income (loss)
from external customers |
|
$ |
43,589 |
|
|
$ |
11,713 |
|
|
$ |
(14,186 |
) |
|
$ |
4,339 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
45,455 |
|
Intersegment net interest
(loss) income |
|
|
(12,613 |
) |
|
|
(1,346 |
) |
|
|
18,398 |
|
|
|
(2,087 |
) |
|
|
(2,352 |
) |
|
|
|
|
|
|
|
|
Total net interest income (loss) |
|
|
30,976 |
|
|
|
10,367 |
|
|
|
4,212 |
|
|
|
2,252 |
|
|
|
(2,352 |
) |
|
|
|
|
|
|
45,455 |
|
Provision for loan and lease
losses |
|
|
6,502 |
|
|
|
358 |
|
|
|
|
|
|
|
6,463 |
|
|
|
|
|
|
|
|
|
|
|
13,323 |
|
Non-interest income (loss) |
|
|
23,040 |
|
|
|
934 |
|
|
|
14,864 |
|
|
|
|
|
|
|
(41 |
) |
|
|
|
|
|
|
38,797 |
|
Depreciation and amortization |
|
|
1,522 |
|
|
|
261 |
|
|
|
|
|
|
|
1 |
|
|
|
1,679 |
|
|
|
|
|
|
|
3,463 |
|
Non-interest expense |
|
|
30,288 |
|
|
|
5,123 |
|
|
|
4,515 |
|
|
|
5,490 |
|
|
|
14,702 |
|
|
|
|
|
|
|
60,118 |
|
Net income (loss) before income
taxes and corporate allocations |
|
|
15,704 |
|
|
|
5,559 |
|
|
|
14,561 |
|
|
|
(9,702 |
) |
|
|
(18,774 |
) |
|
|
|
|
|
|
7,348 |
|
Allocation of corporate |
|
|
14,197 |
|
|
|
3,398 |
|
|
|
|
|
|
|
1,179 |
|
|
|
(18,774 |
) |
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes |
|
|
1,507 |
|
|
|
2,161 |
|
|
|
14,561 |
|
|
|
(10,881 |
) |
|
|
|
|
|
|
|
|
|
|
7,348 |
|
Identifiable assets |
|
|
6,253,327 |
|
|
|
1,295,428 |
|
|
|
3,262,710 |
|
|
|
611,010 |
|
|
|
224,326 |
|
|
|
(3,631,105 |
) |
|
|
8,015,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidating |
|
|
|
|
|
|
|
|
(In thousands) |
|
Puerto Rico |
|
United States |
|
Treasury |
|
Operations |
|
Corporate |
|
Intersegment (1) |
|
Total |
Net interest income (loss)
from external customers |
|
$ |
88,549 |
|
|
$ |
23,549 |
|
|
$ |
(30,980 |
) |
|
$ |
7,507 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
88,625 |
|
Intersegment net interest
(loss) income |
|
|
(28,353 |
) |
|
|
(2,294 |
) |
|
|
39,216 |
|
|
|
(4,180 |
) |
|
|
(4,389 |
) |
|
|
|
|
|
|
|
|
Total net interest income (loss) |
|
|
60,196 |
|
|
$ |
21,255 |
|
|
$ |
8,236 |
|
|
$ |
3,327 |
|
|
$ |
(4,389 |
) |
|
$ |
|
|
|
|
88,625 |
|
Provision (recovery) for loan
and lease losses |
|
|
6,044 |
|
|
|
(38 |
) |
|
|
|
|
|
|
9,908 |
|
|
|
|
|
|
|
|
|
|
|
15,914 |
|
Non-interest income (loss) |
|
|
46,554 |
|
|
|
2,867 |
|
|
|
18,044 |
|
|
|
(2 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
67,422 |
|
Depreciation and amortization |
|
|
3,097 |
|
|
|
424 |
|
|
|
|
|
|
|
2 |
|
|
|
3,143 |
|
|
|
|
|
|
|
6,666 |
|
Non-interest expense |
|
|
58,156 |
|
|
|
11,464 |
|
|
|
9,119 |
|
|
|
11,387 |
|
|
|
27,573 |
|
|
|
|
|
|
|
117,699 |
|
Net income (loss) before income
taxes and corporate allocations |
|
|
39,453 |
|
|
|
12,272 |
|
|
|
17,161 |
|
|
|
(17,972 |
) |
|
|
(35,146 |
) |
|
|
|
|
|
|
15,768 |
|
Allocation of corporate |
|
|
26,895 |
|
|
|
6,002 |
|
|
|
35 |
|
|
|
2,214 |
|
|
|
(35,146 |
) |
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes |
|
|
12,558 |
|
|
|
6,270 |
|
|
|
17,126 |
|
|
|
(20,186 |
) |
|
|
|
|
|
|
|
|
|
|
15,768 |
|
Identifiable assets |
|
|
6,253,327 |
|
|
|
1,295,428 |
|
|
|
3,262,710 |
|
|
|
611,010 |
|
|
|
224,326 |
|
|
|
(3,631,105 |
) |
|
|
8,015,696 |
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
Insurance |
|
Intersegment |
|
|
(In thousands) |
|
Banking |
|
Banking |
|
Agency |
|
Eliminations (1) |
|
Totals |
Net interest income |
|
$ |
1,040 |
|
|
$ |
43,237 |
|
|
$ |
|
|
|
$ |
1,178 |
|
|
$ |
45,455 |
|
Provision for loan
and lease losses |
|
|
4,036 |
|
|
|
9,287 |
|
|
|
|
|
|
|
|
|
|
|
13,323 |
|
Non-interest income |
|
|
9,677 |
|
|
|
30,038 |
|
|
|
2,438 |
|
|
|
(3,356 |
) |
|
|
38,797 |
|
(Loss) Income before
income taxes |
|
|
(2,355 |
) |
|
|
7,647 |
|
|
|
1,830 |
|
|
|
226 |
|
|
|
7,348 |
|
Net (loss) income |
|
|
(2,034 |
) |
|
|
5,176 |
|
|
|
1,059 |
|
|
|
275 |
|
|
|
4,476 |
|
Identifiable assets |
|
|
1,723,272 |
|
|
|
7,344,397 |
|
|
|
12,175 |
|
|
|
(1,064,149 |
) |
|
|
8,015,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
Insurance |
|
Intersegment |
|
|
(In thousands) |
|
Banking |
|
Banking |
|
Agency |
|
Eliminations (1) |
|
Totals |
Net interest income |
|
$ |
2,068 |
|
|
$ |
36,507 |
|
|
$ |
|
|
|
$ |
1,490 |
|
|
$ |
40,065 |
|
Provision for loan
and lease losses |
|
|
4,170 |
|
|
|
40,447 |
|
|
|
|
|
|
|
|
|
|
|
44,617 |
|
Non-interest income |
|
|
9,402 |
|
|
|
(128,172 |
) |
|
|
2,482 |
|
|
|
(3,902 |
) |
|
|
(120,190 |
) |
(Loss) Income before
income taxes |
|
|
(20,660 |
) |
|
|
(209,488 |
) |
|
|
1,723 |
|
|
|
(399 |
) |
|
|
(228,824 |
) |
Net (loss) income |
|
|
(20,963 |
) |
|
|
(212,966 |
) |
|
|
1,017 |
|
|
|
(399 |
) |
|
|
(233,311 |
) |
Identifiable assets |
|
|
1,753,139 |
|
|
|
8,679,522 |
|
|
|
19,837 |
|
|
|
(1,055,606 |
) |
|
|
9,396,892 |
|
|
|
|
(1) |
|
The intersegment eliminations in the tables above include servicing fees paid by the
banking subsidiaries to the mortgage banking subsidiary recognized as a reduction of the non
interest income, direct intersegment loan origination costs amortized as yield adjustment or
offset against net gains on mortgage loan sales and fees (mainly related with origination
costs paid by the banking segment to the mortgage banking segment) and other income derived
from intercompany transactions, related principally to rental income paid to Doral Properties,
the Companys subsidiary that owns the corporate headquarters facilities. Assets include
internal funding and investments in subsidiaries accounted for at cost. |
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended June 30, 2011 |
|
|
Mortgage |
|
|
|
|
|
Insurance |
|
Intersegment |
|
|
(In thousands) |
|
Banking |
|
Banking |
|
Agency |
|
Eliminations(1) |
|
Total |
Net interest income |
|
$ |
1,782 |
|
|
$ |
84,556 |
|
|
$ |
|
|
|
$ |
2,287 |
|
|
$ |
88,625 |
|
Provision for loan
and lease losses |
|
|
3,996 |
|
|
|
11,918 |
|
|
|
|
|
|
|
|
|
|
|
15,914 |
|
Non-interest income
|
|
|
16,294 |
|
|
|
54,439 |
|
|
|
4,661 |
|
|
|
(7,972 |
) |
|
|
67,422 |
|
(Loss) income
before income taxes |
|
|
(2,025 |
) |
|
|
15,902 |
|
|
|
3,169 |
|
|
|
(1,278 |
) |
|
|
15,768 |
|
Net (loss) income |
|
|
(3,829 |
) |
|
|
11,003 |
|
|
|
1,853 |
|
|
|
(1,227 |
) |
|
|
7,800 |
|
Identifiable assets |
|
|
1,723,272 |
|
|
|
7,344,397 |
|
|
|
12,175 |
|
|
|
(1,064,148 |
) |
|
|
8,015,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended June 30, 2010 |
|
|
Mortgage |
|
|
|
|
|
Insurance |
|
Intersegment |
|
|
(In thousands) |
|
Banking |
|
Banking |
|
Agency |
|
Eliminations(1) |
|
Total |
Net interest income |
|
$ |
5,454 |
|
|
$ |
75,110 |
|
|
$ |
|
|
|
$ |
3,262 |
|
|
$ |
83,826 |
|
Provision for loan
and lease losses |
|
|
6,287 |
|
|
|
52,251 |
|
|
|
|
|
|
|
|
|
|
|
58,538 |
|
Non-interest income
(loss) |
|
|
15,563 |
|
|
|
(96,548 |
) |
|
|
4,862 |
|
|
|
(7,483 |
) |
|
|
(83,606 |
) |
(Loss) income
before income taxes |
|
|
(28,016 |
) |
|
|
(205,142 |
) |
|
|
3,610 |
|
|
|
(250 |
) |
|
|
(229,798 |
) |
Net (loss) income |
|
|
(28,373 |
) |
|
|
(210,323 |
) |
|
|
2,132 |
|
|
|
(250 |
) |
|
|
(236,814 |
) |
Identifiable assets |
|
|
1,753,139 |
|
|
|
8,679,522 |
|
|
|
19,837 |
|
|
|
(1,055,606 |
) |
|
|
9,396,892 |
|
|
|
|
(1) |
|
The intersegment eliminations in the tables above include servicing fees paid by the
banking subsidiaries to the mortgage banking subsidiary recognized as a reduction of the non
interest income, direct intersegment loan origination costs amortized as yield adjustment or
offset against net gains on mortgage loan sales and fees (mainly related with origination
costs paid by the banking segment to the mortgage banking segment) and other income derived
from intercompany transactions, related principally to rental income paid to Doral Properties,
the Companys subsidiary that owns the corporate headquarters facilities. Assets include
internal funding and investments in subsidiaries accounted for at cost. |
32. Subsequent Events
The Company evaluated subsequent events through the date that these consolidated financial
statements were issued and determined that no events have occurred that require disclosure or
adjustments.
65
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In addition, Doral Financial may make
forward-looking statements in its press releases, other filings with the Securities and Exchange
Commission (SEC) or in other public or shareholder communications and its senior management may
make forward-looking statements orally to analysts, investors, the media and others.
These forward-looking statements may relate to the Companys financial condition, results of
operations, plans, objectives, future performance and business, including, but not limited to,
statements with respect to the adequacy of the allowance for loan and lease losses, market risk and
the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity,
and the effect of legal proceedings, tax legislation and tax rules, regulatory matters and new
accounting standards on the Companys financial condition and results of operations.
Forward-looking statements can be identified by the fact that they do not relate strictly to
historical or current facts, but instead represent Doral Financials current expectations regarding
future events. Such statements may be generally identified by the use of words or phrases such as
would be, will allow, intends to, will likely result, are expected to, will continue,
is anticipated, estimate, project, believe, expect, predict, forecast, anticipate,
target, goal, may or similar expressions.
Doral Financial cautions readers not to place undue reliance on any of these forward-looking
statements since they speak only as of the date made and represent Doral Financials expectations
of future conditions or results and are not guarantees of future performance. The Company does not
undertake and specifically disclaims any obligations to update any forward-looking statements to
reflect occurrences or unanticipated events or circumstances after the date of those statements.
Forward-looking statements are, by their nature, subject to risks and uncertainties and changes in
circumstances, many of which are beyond Doral Financials control. While there is no assurance that
any list of risks and uncertainties or risk factors is complete, below are certain important
factors that could cause actual results to differ materially from those contained in any
forward-looking statement:
|
|
|
the continued recessionary conditions of the Puerto Rico economy and any deterioration
in the performance of the United States economy and capital markets that adversely affect
the general economy, housing prices, the job market, consumer confidence and spending
habits leading to, among other things, (i) a deterioration in the credit quality of our
loans and other assets, (ii) decreased demand for our products and services and lower
revenue and earnings, (iii) reduction in our interest margins, and (iv) decreased
availability and increased pricing of our funding sources, including brokered certificates
of deposits; |
|
|
|
|
the weakness of the Puerto Rico and United States real estate markets and of the Puerto
Rico and United States consumer and commercial credit sectors and its impact in the credit
quality of our loans and other assets which have contributed and may continue to contribute
to, among other things, an increase in our non-performing loans, charge-offs and loan loss
provisions and may subject the Company to further risk from loan defaults and foreclosures; |
|
|
|
|
recent and/or future downgrades of the long-term debt ratings of the United States and the Commonwealth of Puerto Rico
, which could adversely affect economic conditions in the United States and the Commonwealth of Puerto Rico; |
|
|
|
|
a decline in the market value and estimated cash flows of our mortgage-backed
securities and other assets may result in the recognition of other-than-temporary
impairment of such assets under generally accepted accounting principles in the United
States of America; |
|
|
|
|
our ability to derive sufficient income to realize the benefit of the deferred tax
assets; |
|
|
|
|
uncertainty about the legislative and other measures adopted by the Puerto Rico
government in response to its fiscal situation and the impact of such measures on different
sectors of the Puerto Rico economy; |
|
|
|
|
uncertainty about the adopted changes to the Puerto Rico internal revenue code and
other related tax provisions and the impact of such measures on different sectors of the
Puerto Rico economy; |
|
|
|
|
uncertainty about the effectiveness of the various actions undertaken to stimulate the
United States economy and stabilize the United States financial markets, and the impact of
such actions on our business, financial condition and results of operations; |
|
|
|
|
uncertainty about the outcome of regular annual safety and soundness and compliance
examinations by our primary regulators which may contribute to, among other things, an
increase in our charge-offs, loan loss provisions, and compliance costs; |
|
|
|
|
changes in interest rates, which may result from changes in the fiscal and monetary
policy of the federal government, and |
66
|
|
|
the potential impact of such changes in interest
rates on our net interest income and the value of our loans and
investments; |
|
|
|
|
the commercial soundness of our various counterparties of financing and other
securities transactions, which could lead to possible losses when the collateral held by us
to secure the obligations of the counterparty is not sufficient or to possible delays or
losses in recovering any excess collateral belonging to us held by the counterparty; |
|
|
|
|
higher credit losses because of federal or state legislation or regulatory action that
either (i) reduces the amount that our borrowers are required to pay us, or (ii) limits our
ability to foreclose on properties or collateral or makes foreclosures less economically
feasible; |
|
|
|
|
developments in the regulatory and legal environment for public companies and financial
services companies in the United States (including Puerto Rico) as a result of, among other
things, the adoption in July 2010 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act and the regulations adopted and to be adopted thereunder by various federal
and state securities and banking regulatory agencies, and the impact of such developments
on our business, business practices, capital requirements and costs of operations; |
|
|
|
|
the exposure of Doral Financial, as originator of residential mortgage loans, sponsor
of residential mortgage loan securitization transactions, or servicer of such loans or such
transactions, or in other capacities, to government sponsored enterprises (GSEs),
investors, mortgage insurers or other third parties as a result of representations and
warranties made in connection with the transfer or securitization of such loans; |
|
|
|
|
the risk of possible failure or circumvention of our controls and procedures, and the
risk that our risk management policies may be inadequate; |
|
|
|
|
the risk that the FDIC may further increase deposit insurance premiums and/or require
special assessments to replenish its insurance fund, causing an additional increase in the
Companys non-interest expense; |
|
|
|
|
changes in our accounting policies or in accounting standards, and changes in how
accounting standards are interpreted or applied; |
|
|
|
|
general competitive factors and industry consolidation; |
|
|
|
|
the strategies adopted by the FDIC and the three acquiring banks in connection with the
resolution of the residential, construction and commercial real estate loans acquired in
connection with the three Puerto Rico banks that failed in April 2010, which may adversely
affect real estate values in Puerto Rico; |
|
|
|
|
to the extent we make any acquisitions, including FDIC-assisted acquisitions of assets
and liabilities of failed banks, the risks and difficulties relating to combining the
acquired operations with our existing operations; |
|
|
|
|
potential adverse outcome in the legal or regulatory actions or proceedings described
in Part I, Item 3 Legal Proceedings in the Companys 2010 Annual Report on Form 10-K, as
updated in Part II, Item 1 Legal Proceedings in the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 and
as updated from time to time in the Companys future reports filed with the SEC; and |
|
|
|
|
the other risks and uncertainties detailed in Part II, Item 1A Risk Factors in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010, as updated in
Part II, Item 1A Risk Factors in the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011 and as updated from time to time in the Companys future reports filed with
the SEC. |
67
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial discussion contains an analysis of the consolidated financial position and
consolidated results of operations of Doral Financial Corporation and its wholly-owned subsidiaries
and should be read in conjunction with the consolidated financial statements, notes and tables
included elsewhere in this report.
In addition to the information contained in this Form 10-Q, readers should consider the description
of the Companys business contained in Item 1 of the Companys Form 10-K for the year ended
December 31, 2010. While not all inclusive, Items 1 and 1A of the Form 10-K disclose additional
information about the business of the Company, risk factors, many beyond the Companys control, and
further provide discussion of the operating results, financial condition and credit, market and
liquidity risks than that which is presented in the narrative and tables included herein.
OVERVIEW OF RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2011 totalled $4.5 million, compared to a net loss of
$233.3 million for the comparable 2010 period. Doral Financials performance for the second quarter
of 2011, compared to the second quarter of 2010 was primarily due to (i) an increase in net gain on
investment securities of $152.0 million as approximately $378.0 million of low quality non-agency
securities were sold in April 2010 at a loss of $136.7 million; (ii) a decrease of $30.6 million in
other provisions and OREO expenses generally to recognize deterioration of credit quality in 2010 not
experienced in 2011; (iii) a decrease of $31.3 million in the provision for loan and lease losses
in part due to a write down of $13 million of certain loan assets to facilitate their sale in July
2010 and improvements in delinquency of the loan portfolio; (iv) and an increase of $5.4
million in net interest income resulting from structural changes in the balance sheet to generate
higher sustainable net interest income.
The Companys financial results and condition for the quarter ended June 30, 2011 included the
following:
|
|
|
Net income attributable to common shareholders for the second quarter of
2011 totalled $2.1 million, and resulted in a net income per share of $0.02, compared to
a net loss attributable to common shareholders for the corresponding 2010 period of
$235.7 million, or a loss per share of $3.50. |
|
|
|
|
Net interest income for the second quarter of 2011 was $45.5 million,
compared to $40.1 million for the corresponding period in 2010. The increase of $5.4
million in net interest income for 2011, compared to 2010, was due to a decrease in
interest income of $10.0 million, or 9.9%, partially offset by a decrease in interest
expense of $15.4 million, or 25.2%. The decrease in interest income was driven by a
decrease in interest on mortgage backed securities of $9.3 million from the sale of
securities to delever the bank and decrease the banks sensitivity to increasing
interest rates. The decrease in interest expense was driven by decreases of $7.5 million
in interest expense on securities sold under agreements to repurchase, $4.1 million in
interest expense on advances from FHLB and $5.0 million on deposits, partially offset by
an increase in interest expense of $1.5 million in notes payable primarily related to a
$250.0 million debt issued under the CLO at a rate of 3-month LIBOR plus 1.85% in July
2010. Lower interest expense charges resulted from changes to FHLB borrowings (advances
and repos) that extended duration and lowered interest rates, and efforts to lower
retail deposit rates in Puerto Rico and brokered CDs. |
|
|
|
|
The provision for loan and lease losses for the quarter ended June 30, 2011
totalled $13.3 million, a decrease of $31.3 million over the $44.6 million provision for
the corresponding 2010 period. The decrease in the provision for loan and lease losses
for the second quarter of 2011 resulted primarily from the Puerto Rico loan portfolios,
and reflects specific provisions made in the second quarter of 2010 to write down assets
sold in July 2010 to their sales price and reflect the effect on the loan loss provision
of writing down OREO to facilitate faster sales and the lower level of non-performing
loans in the second quarter of 2011. |
|
|
|
|
Non-interest income for the second quarter of 2011 was $38.8 million, an
increase of $159.0 million compared to non-interest loss of $120.2 million for the
corresponding 2010 period. The increase in non-interest income for the second quarter of
2011, compared to the same period in 2010 resulting from the
following (i) during the
second quarter of 2010 the Company recognized a loss on sale of securities of $137.2
million driven by a loss of $136.7 million on the sale of $378.0 million of certain
non-agency CMOs, (ii) during the second quarter of 2011 the Company had a gain on sale of
investment securities of $14.8 million as a result of its deleveraging of the balance
sheet and (iii) servicing income increased $5.9 million related to an improvement in the
mark to market adjustment of the MSRs of $3.4 million. The
improvement in the value of the MSRs was primarily due to a reduction in
prepayment speeds. The improvement in servicing income was driven by lower interest losses
of $3.5 million. During the second quarter of 2010 the Company recognized an interest
loss on servicing advances of $4.2 million related to the |
68
|
|
|
repurchase of certain GNMA defaulted loans. This improvement was partially offset by
lower servicing fees of $0.7 million as the serviced loan portfolio continues to run-off
from prepayments. |
|
|
|
|
Non-interest expense for the second quarter of 2011 was $63.6 million,
compared to $104.1 million for the corresponding period in 2010. The $40.5 million
decrease in non-interest expenses for the second quarter of 2011 compared to the same
period in 2010, was due to (i) a decrease of $10.8 million in the reserve for the
Companys claim on Lehman Brothers Inc. that was established in the second quarter of
2010; this claim was subsequently sold to a third party; (ii) a decrease in OREO expenses of
$21.4 million related to an additional provision for OREO losses of $17.0 million
established during the second quarter of 2010 to recognize the effect of managements
decision to reduce pricing to stimulate property sales, adjustments driven by lower
values of certain OREO properties, and higher maintenance costs to maintain the
properties in saleable condition; (iii) a decrease of $6.1 million in professional
services driven by lower defense litigation costs of $4.2 million, lower advisory
services of $0.5 million related to the dissolution of Doral Holdings and Doral Holdings
L.P., and lower advisory services of $1.3 million in 2011 compared to 2010 which were
incurred in relation to the sale of certain construction loans; (iv) a decrease in
advertising expense of $2.3 million related to campaigns conducted to gain market share
in deposits and mortgage originations subsequent to the local market bank failures and
asset acquisition in April 2010; (v) lower FDIC insurance expense of $1.8 million
related to a lower deposit base and a change in the method of computing the assessment;
and (vi) an increase of $1.6 million in other credit
related expenses which was due to an
increase of $0.9 million in foreclosure expenses and $0.9 million in the provision for
negative escrow. |
|
|
|
|
An income tax expense of $2.9 million for the second quarter of 2011,
compared to an income tax expense of $4.5 million for the corresponding period in 2010.
The decrease in tax expense was due to taxes recognized in 2010 related to U.S. source
income partially
offset by realization of operational deferred tax assets. |
|
|
|
|
Doral Financials loan production for the second quarter of 2011 was $464.7
million, compared to $380.2 million for the comparable 2010 period, an increase of
approximately 22.2%. The production increase resulted mainly from the US loan
production. |
|
|
|
|
Assets as of June 30, 2011 totalled $8.0 billion compared to $8.6 billion as
of December 31, 2010, a decrease of $0.6 billion or 7.3%. The decrease in assets was due
mainly to the sale of $870.0 million of mortgage backed
securities during the first half of 2011. These sales
were conducted pursuant to the Companys deleveraging of the balance sheet. |
|
|
|
|
Total deposits of $4.3 billion decreased $315.7 million, or 6.8%, from
deposits of $4.6 billion as of December 31, 2010. The year-to-date deposit decrease
resulted from a decrease of $328.2 million, or 13.9%, in brokered deposits, partially
offset by a $12.5 million, or 0.6%, increase in non-brokered deposits. |
|
|
|
|
Non-performing loans (NPLs), excluding FHA/VA loans guaranteed by the US
government, as of June 30, 2011 were $560.5 million, a decrease of $11.0 million and
$65.9 million from March 31, 2011 and December 31, 2010, respectively. The reduction in
NPLs was a result of continued emphasis on collections and restructures to optimize
performance of the loan portfolio as well as the effect of net charge-offs of $40.1
million in the second quarter of 2011 compared to net charge-offs of $6.0 million in the
first quarter of 2011. |
69
Table A
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands, except for share data) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Selected Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
91,117 |
|
|
$ |
101,077 |
|
|
$ |
185,108 |
|
|
$ |
210,305 |
|
Interest expense |
|
|
45,662 |
|
|
|
61,012 |
|
|
|
96,483 |
|
|
|
126,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
45,455 |
|
|
|
40,065 |
|
|
|
88,625 |
|
|
|
83,826 |
|
Provision for loan and lease losses |
|
|
13,323 |
|
|
|
44,617 |
|
|
|
15,914 |
|
|
|
58,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan and lease losses |
|
|
32,132 |
|
|
|
(4,552 |
) |
|
|
72,711 |
|
|
|
25,288 |
|
Non-interest income (loss) |
|
|
38,797 |
|
|
|
(120,190 |
) |
|
|
67,422 |
|
|
|
(83,606 |
) |
Non-interest expenses |
|
|
63,581 |
|
|
|
104,082 |
|
|
|
124,365 |
|
|
|
171,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
7,348 |
|
|
|
(228,824 |
) |
|
|
15,768 |
|
|
|
(229,798 |
) |
Income tax expense |
|
|
2,871 |
|
|
|
4,487 |
|
|
|
7,968 |
|
|
|
7,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,477 |
|
|
$ |
(233,311 |
) |
|
$ |
7,800 |
|
|
$ |
(236,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders(1) |
|
$ |
2,062 |
|
|
$ |
(235,726 |
) |
|
$ |
2,970 |
|
|
$ |
(214,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per common share(2) |
|
$ |
0.02 |
|
|
$ |
(3.50 |
) |
|
$ |
0.02 |
|
|
$ |
(3.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends, preferred stock |
|
$ |
2,415 |
|
|
$ |
2,415 |
|
|
$ |
4,830 |
|
|
$ |
4,279 |
|
Preferred stock exchange premium, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(26,585 |
) |
Book value per common share |
|
$ |
4.02 |
|
|
$ |
6.27 |
|
|
$ |
4.02 |
|
|
$ |
6.27 |
|
Preferred shares outstanding at end of period |
|
|
5,811,391 |
|
|
|
6,096,393 |
|
|
|
5,811,391 |
|
|
|
6,096,393 |
|
Weighted average common shares outstanding |
|
|
127,293,756 |
|
|
|
67,285,568 |
|
|
|
127,293,756 |
|
|
|
64,920,036 |
|
Common shares outstanding at end of period |
|
|
127,293,756 |
|
|
|
67,293,370 |
|
|
|
127,293,756 |
|
|
|
67,293,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Data at Period End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
790,605 |
|
|
$ |
2,527,802 |
|
|
$ |
790,605 |
|
|
$ |
2,527,802 |
|
Total loans,
net(3) |
|
|
5,897,060 |
|
|
|
5,768,728 |
|
|
|
5,897,060 |
|
|
|
5,768,728 |
|
Allowance for loan and lease losses |
|
|
93,472 |
|
|
|
134,913 |
|
|
|
93,472 |
|
|
|
134,913 |
|
Servicing assets, net |
|
|
115,785 |
|
|
|
113,005 |
|
|
|
115,785 |
|
|
|
113,005 |
|
Total assets |
|
|
8,015,696 |
|
|
|
9,393,533 |
|
|
|
8,015,696 |
|
|
|
9,393,533 |
|
Deposits |
|
|
4,302,792 |
|
|
|
4,940,569 |
|
|
|
4,302,792 |
|
|
|
4,940,569 |
|
Total borrowings |
|
|
2,590,202 |
|
|
|
3,265,020 |
|
|
|
2,590,202 |
|
|
|
3,265,020 |
|
Total liabilities |
|
|
7,151,436 |
|
|
|
8,448,561 |
|
|
|
7,151,436 |
|
|
|
8,448,561 |
|
Preferred equity |
|
|
352,082 |
|
|
|
523,082 |
|
|
|
352,082 |
|
|
|
523,082 |
|
Common equity |
|
|
512,178 |
|
|
|
421,890 |
|
|
|
512,178 |
|
|
|
421,890 |
|
Total stockholders equity |
|
|
864,260 |
|
|
|
944,972 |
|
|
|
864,260 |
|
|
|
944,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Average Balance Sheet Data for Period End: (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
1,258,527 |
|
|
$ |
2,284,672 |
|
|
$ |
1,422,522 |
|
|
$ |
2,603,284 |
|
Total
loans(3) |
|
|
5,890,682 |
|
|
|
5,876,723 |
|
|
|
5,878,311 |
|
|
|
5,858,009 |
|
Total interest-earning assets |
|
|
7,729,926 |
|
|
|
8,747,284 |
|
|
|
7,790,441 |
|
|
|
9,123,226 |
|
Total assets |
|
|
8,381,285 |
|
|
|
9,427,981 |
|
|
|
8,455,508 |
|
|
|
9,808,502 |
|
Deposits |
|
|
4,449,327 |
|
|
|
4,644,841 |
|
|
|
4,496,081 |
|
|
|
4,648,579 |
|
Total borrowings |
|
|
2,814,985 |
|
|
|
3,449,652 |
|
|
|
2,831,581 |
|
|
|
3,876,960 |
|
Total interest-bearing liabilities |
|
|
6,997,000 |
|
|
|
7,863,038 |
|
|
|
7,055,458 |
|
|
|
8,287,745 |
|
Preferred equity |
|
|
352,082 |
|
|
|
486,191 |
|
|
|
352,082 |
|
|
|
448,205 |
|
Common equity |
|
|
518,602 |
|
|
|
468,198 |
|
|
|
513,195 |
|
|
|
468,161 |
|
Total stockholders equity |
|
|
870,684 |
|
|
|
954,389 |
|
|
|
865,277 |
|
|
|
916,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan production |
|
$ |
464,653 |
|
|
$ |
380,170 |
|
|
$ |
814,742 |
|
|
$ |
669,225 |
|
Loan
servicing portfolio (5) |
|
|
8,045,830 |
|
|
|
8,335,364 |
|
|
|
8,045,830 |
|
|
|
8,335,364 |
|
Selected Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
2.36 |
% |
|
|
1.84 |
% |
|
|
2.29 |
% |
|
|
1.85 |
% |
Return on
average assets (4) |
|
|
0.21 |
% |
|
|
(9.93 |
)% |
|
|
0.19 |
% |
|
|
(4.87 |
)% |
Return on
average common
equity(4)(6) |
|
|
1.59 |
% |
|
|
(201.94 |
)% |
|
|
1.17 |
% |
|
|
(103.85 |
)% |
Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
9.07 |
% |
|
|
8.52 |
% |
|
|
9.07 |
% |
|
|
8.52 |
% |
Tier 1 risk-based capital ratio |
|
|
13.41 |
% |
|
|
13.99 |
% |
|
|
13.41 |
% |
|
|
13.99 |
% |
Total risk-based capital ratio |
|
|
14.67 |
% |
|
|
15.26 |
% |
|
|
14.67 |
% |
|
|
15.26 |
% |
Asset quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs as percentage of the loan portfolio, net, and OREO (excluding GNMA defaulted loans) |
|
|
12.73 |
% |
|
|
18.26 |
% |
|
|
12.73 |
% |
|
|
18.26 |
% |
Total NPAs as percentage of consolidated total assets |
|
|
9.29 |
% |
|
|
11.18 |
% |
|
|
9.29 |
% |
|
|
11.18 |
% |
ALLL as a percentage of loans receivable outstanding, at end of period |
|
|
1.64 |
% |
|
|
2.44 |
% |
|
|
1.64 |
% |
|
|
2.44 |
% |
ALLL plus partial charge-offs and discounts to loans receivable (excluding FHA/VA guaranteed loans and loans
on savings) |
|
|
3.70 |
% |
|
|
2.47 |
% |
|
|
3.70 |
% |
|
|
2.47 |
% |
ALLL to non-performing loans (excluding NPLs held for sale) |
|
|
16.75 |
% |
|
|
17.65 |
% |
|
|
16.75 |
% |
|
|
17.65 |
% |
ALLL plus partial charge-offs and discounts to non-performing loans (excluding NPLs held for sale) |
|
|
36.89 |
% |
|
|
19.46 |
% |
|
|
36.89 |
% |
|
|
19.46 |
% |
Provision for loan and lease losses to net charge-offs |
|
|
33.26 |
% |
|
|
78.02 |
% |
|
|
34.53 |
% |
|
|
90.90 |
% |
Net charge-offs to average loan receivable outstanding |
|
|
0.71 |
% |
|
|
1.03 |
% |
|
|
0.83 |
% |
|
|
1.16 |
% |
ALLL to net charge-offs on an annualized basis |
|
|
58.18 |
% |
|
|
58.82 |
% |
|
|
100.56 |
% |
|
|
103.89 |
% |
Other ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common equity to average assets(4) |
|
|
6.19 |
% |
|
|
4.97 |
% |
|
|
6.07 |
% |
|
|
4.77 |
% |
Tier 1 common equity to risk-weighted assets |
|
|
7.11 |
% |
|
|
4.79 |
% |
|
|
7.11 |
% |
|
|
4.79 |
% |
70
|
|
|
(1) |
|
For the six month period ended June 30, 2010, includes $26.6
million related to the net effect of the conversion of preferred
stock during the period indicated. |
|
(2) |
|
For the quarters and six month periods ended June 30, 2011 and 2010, net
income (loss) per common share represents the basic and diluted
income (loss) per common
share, respectively, for each of the periods presented. |
|
(3) |
|
Includes loans held for sale. |
|
(4) |
|
Average balances are computed on a daily basis. |
|
(5) |
|
Represents the total portfolio of loans serviced for third parties. Excludes
$4.5 billion of mortgage loans owned by Doral Financial at June 30, 2011 and June 30, 2010. |
|
(6) |
|
Excludes the effect of the preferred stock exchange inducement |
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires management to make a
number of judgments, estimates and assumptions that affect the reported amount of assets,
liabilities, income and expenses in the Companys consolidated financial statements and
accompanying notes. Certain of these estimates are critical to the presentation of the Companys
financial condition and results of operations since they are particularly sensitive to the
Companys judgment and are highly complex in nature. Doral Financial believes that the judgments,
estimates and assumptions used in the preparation of its consolidated financial statements are
appropriate given the factual circumstances as of June 30, 2011. However, given the sensitivity of
Doral Financials consolidated financial statements to these estimates, the use of other judgments,
estimates and assumptions could result in material differences in the Companys results of
operations or financial condition. Critical Accounting Policies are detailed in Part II, Item 7
Managements Discussion and Analysis in the Companys 2010 Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting pronouncements, please refer to Note 2 of the accompanying
Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTH PERIODS ENDED JUNE 30, 2011 AND 2010
NET INTEREST INCOME
Net interest income is the excess of interest earned by Doral Financial on its interest-earning
assets over the interest incurred on its interest-bearing liabilities. Doral Financials net
interest income is subject to interest rate risk resulting from the repricing and maturity mismatch
in the Companys assets and liabilities. Generally, Doral Financials assets have a longer maturity
and a longer period to repricing date than its liabilities, which results in lower net interest
income in periods of rising short-term interest rates and higher net interest income in periods of
declining short-term interest rates. Please refer to Risk Management below for additional
information on the Companys exposure to interest rate risk.
Second Quarter 2011 vs. Second Quarter 2010 - Net interest margin increased 52
basis points to 2.36% for the second quarter of 2011 from 1.84% for the quarter ended June 30,
2010. An increase of $5.4 million in net interest income was due to a decrease in interest expense
of $15.4 million partially offset by a decrease in interest income of $10.0 million. The decrease
in interest expense is attributed to decreases of $7.5 million in interest expense on securities
sold under agreements to repurchase, $4.1 million in interest expense on advances from FHLB and
$5.0 million on deposits, partially offset by an increase in interest expense of $1.5 million in
notes payable primarily related to a $250.0 million debt issued under the CLO at a rate of 3-month
LIBOR plus 1.85% in July 2010. The decreased interest expense results from successful efforts to
restructure Dorals advances from FHLB and securities sold under
agreements to repurchase to lower rates and extend duration, and lower rates
paid on Puerto Rico sourced deposits and brokered deposits. The decrease in interest income was
driven by a decrease in interest on mortgage backed securities of $9.3 million from the sale of
securities to delever the bank and decrease the banks sensitivity to increasing interest rates.
Average interest-earning assets decreased $1.0 billion, from $8.7 billion for the second quarter of
2010 to $7.7 billion for the corresponding 2011 period, while average interest-bearing liabilities
decreased $866.0 million, from $7.9 billion for the second quarter of 2010 to
$7.0 billion, for the same 2011 period.
Six Month Period Ended June 30, 2011 vs. Six Month Period Ended June 30, 2010 Net
interest margin increased 44 basis points to 2.29% for the six month period ended June 30, 2011,
compared to 1.85% for the same period in 2010. An increase of $4.8 million in net interest income
was driven by a decrease in interest expense of $30.0 million and partially offset by a decrease in
interest income of $25.2 million. The decrease in interest expense was mainly due to (i) a decrease
of $4.8 million on interest on deposits as the brokered deposits portfolio continued to decrease in
size and interest rate as well as a reduction in interest rates of other interest bearing deposits,
and (ii) a decrease in interest of securities sold under agreements to repurchase of $16.4 million
71
due to the
strategic restructuring of Dorals FHLB borrowings during the
first half of 2011 to increase
term to maturity and reduce rates. These decreases were partially offset by an increase in notes
payable of $3.0 million related to the $250.0 million debt issued under the CLO in July 2010. The
decrease in interest income was driven by an increase in interest income from growth of the US
commercial loan portfolio more than offset by a decrease in interest on mortgage backed securities
of $21.5 million related
to the strategic delevering of the bank to reduce future interest income sensitivity. Average
interest-earning assets decreased $1.3 billion, from $9.1 billion for the six month period ended
June 30, 2010 to $7.8 billion for the corresponding 2011 period, while average interest-bearing
liabilities decreased $1.2 billion, from $8.3 billion to $7.1 billion, for the same periods.
The following tables present, for the periods indicated, Doral Financials average balance sheet,
the total dollar amount of interest income from its average interest-earning assets and the related
yields, as well as the interest expense on its average interest-bearing liabilities, expressed in
both dollars and rates, and the net interest margin and spread. These tables do not reflect any
effect of income taxes. Average balances are based on average daily balances.
72
Table B
Average Balance Sheet and Summary of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1) |
|
$ |
3,936,498 |
|
|
$ |
53,671 |
|
|
|
5.47 |
% |
|
$ |
4,117,768 |
|
|
$ |
57,956 |
|
|
|
5.65 |
% |
Lease financing receivables |
|
|
3,220 |
|
|
|
47 |
|
|
|
5.83 |
% |
|
|
9,701 |
|
|
|
122 |
|
|
|
5.04 |
% |
Consumer |
|
|
48,399 |
|
|
|
1,719 |
|
|
|
14.25 |
% |
|
|
66,889 |
|
|
|
2,805 |
|
|
|
16.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,988,117 |
|
|
|
55,437 |
|
|
|
5.58 |
% |
|
|
4,194,358 |
|
|
|
60,883 |
|
|
|
5.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
704,104 |
|
|
|
8,964 |
|
|
|
5.11 |
% |
|
|
778,372 |
|
|
|
10,145 |
|
|
|
5.23 |
% |
Commercial and industrial |
|
|
768,847 |
|
|
|
10,275 |
|
|
|
5.36 |
% |
|
|
370,747 |
|
|
|
5,015 |
|
|
|
5.43 |
% |
Construction and land |
|
|
429,614 |
|
|
|
4,562 |
|
|
|
4.26 |
% |
|
|
533,246 |
|
|
|
2,873 |
|
|
|
2.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,902,565 |
|
|
|
23,801 |
|
|
|
5.02 |
% |
|
|
1,682,365 |
|
|
|
18,033 |
|
|
|
4.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (2) |
|
|
5,890,682 |
|
|
|
79,238 |
|
|
|
5.40 |
% |
|
|
5,876,723 |
|
|
|
78,916 |
|
|
|
5.39 |
% |
Mortgage-backed securities |
|
|
1,111,699 |
|
|
|
9,221 |
|
|
|
3.33 |
% |
|
|
2,197,216 |
|
|
|
18,542 |
|
|
|
3.38 |
% |
Interest-only strips (IOs) |
|
|
43,901 |
|
|
|
1,508 |
|
|
|
13.78 |
% |
|
|
43,946 |
|
|
|
1,491 |
|
|
|
13.61 |
% |
Investment securities |
|
|
102,927 |
|
|
|
130 |
|
|
|
0.51 |
% |
|
|
43,510 |
|
|
|
583 |
|
|
|
5.37 |
% |
Other interest-earning assets |
|
|
580,717 |
|
|
|
1,020 |
|
|
|
0.70 |
% |
|
|
585,889 |
|
|
|
1,545 |
|
|
|
1.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets/interest income |
|
|
7,729,926 |
|
|
$ |
91,117 |
|
|
|
4.73 |
% |
|
|
8,747,284 |
|
|
$ |
101,077 |
|
|
|
4.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets |
|
|
651,359 |
|
|
|
|
|
|
|
|
|
|
|
680,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,381,285 |
|
|
|
|
|
|
|
|
|
|
$ |
9,427,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
2,018,048 |
|
|
$ |
6,985 |
|
|
|
1.39 |
% |
|
$ |
1,732,410 |
|
|
$ |
8,594 |
|
|
|
1.99 |
% |
Brokered CDs |
|
|
2,163,967 |
|
|
|
15,558 |
|
|
|
2.88 |
% |
|
|
2,680,976 |
|
|
|
18,993 |
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,182,015 |
|
|
|
22,543 |
|
|
|
2.16 |
% |
|
|
4,413,386 |
|
|
|
27,587 |
|
|
|
2.51 |
% |
Repurchase agreements |
|
|
882,607 |
|
|
|
6,238 |
|
|
|
2.83 |
% |
|
|
1,597,173 |
|
|
|
13,738 |
|
|
|
3.45 |
% |
Advances from FHLB |
|
|
1,122,093 |
|
|
|
8,822 |
|
|
|
3.15 |
% |
|
|
1,254,513 |
|
|
|
12,921 |
|
|
|
4.13 |
% |
Other short-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
3,791 |
|
|
|
4 |
|
|
|
0.49 |
% |
Loans payable |
|
|
298,555 |
|
|
|
1,498 |
|
|
|
2.01 |
% |
|
|
325,378 |
|
|
|
1,676 |
|
|
|
2.07 |
% |
Notes payable |
|
|
511,730 |
|
|
|
6,560 |
|
|
|
5.13 |
% |
|
|
268,797 |
|
|
|
5,086 |
|
|
|
7.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities/interest expense |
|
|
6,997,000 |
|
|
$ |
45,661 |
|
|
|
2.62 |
% |
|
|
7,863,038 |
|
|
$ |
61,012 |
|
|
|
3.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
274,822 |
|
|
|
|
|
|
|
|
|
|
|
231,455 |
|
|
|
|
|
|
|
|
|
Other non-interest bearing liabilities |
|
|
238,779 |
|
|
|
|
|
|
|
|
|
|
|
379,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities |
|
|
513,601 |
|
|
|
|
|
|
|
|
|
|
|
610,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
7,510,601 |
|
|
|
|
|
|
|
|
|
|
|
8,473,592 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
870,684 |
|
|
|
|
|
|
|
|
|
|
|
954,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
8,381,285 |
|
|
|
|
|
|
|
|
|
|
$ |
9,427,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
732,926 |
|
|
|
|
|
|
|
|
|
|
$ |
884,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a non-taxable equivalent basis |
|
|
|
|
|
$ |
45,456 |
|
|
|
|
|
|
|
|
|
|
$ |
40,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (3) |
|
|
|
|
|
|
|
|
|
|
2.11 |
% |
|
|
|
|
|
|
|
|
|
|
1.52 |
% |
Interest rate margin (4) |
|
|
|
|
|
|
|
|
|
|
2.36 |
% |
|
|
|
|
|
|
|
|
|
|
1.84 |
% |
Net interest-earning assets ratio (5) |
|
|
|
|
|
|
|
|
|
|
110.47 |
% |
|
|
|
|
|
|
|
|
|
|
111.25 |
% |
73
|
|
|
(1) |
|
Average loan balances include the average balance of non-accruing loans, on which
interest income is recognized when collected. Also, includes the average balance of GNMA
defaulted loans for which the Company has an unconditional buy-back option. |
|
(2) |
|
Interest income on loans includes $76,000 and $0.2 million for the second quarter of
2011 and 2010, respectively, of income from prepayment penalties related to the Companys loan
portfolio. |
|
(3) |
|
Interest rate spreads represents the difference between the weighted-average yield
on interest-earning assets and the weighted-average yield on interest bearing liabilities. |
|
(4) |
|
Interest rate margin represents net interest income on an annualized basis as a
percentage of average interest-earning assets. |
|
(5) |
|
Net interest-earning assets ratio represents average interest-earning assets as a
percentage of average interest-bearing liabilities. |
74
Table C
Average Balance Sheet and Summary of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1) |
|
$ |
3,971,743 |
|
|
$ |
107,903 |
|
|
|
5.48 |
% |
|
$ |
4,113,655 |
|
|
$ |
118,822 |
|
|
|
5.82 |
% |
Lease financing receivables |
|
|
3,755 |
|
|
|
122 |
|
|
|
6.56 |
% |
|
|
10,671 |
|
|
|
228 |
|
|
|
4.31 |
% |
Consumer |
|
|
50,347 |
|
|
|
3,560 |
|
|
|
14.26 |
% |
|
|
69,207 |
|
|
|
4,705 |
|
|
|
13.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,025,845 |
|
|
|
111,585 |
|
|
|
5.59 |
% |
|
|
4,193,533 |
|
|
|
123,755 |
|
|
|
5.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
698,116 |
|
|
|
17,231 |
|
|
|
4.98 |
% |
|
|
775,549 |
|
|
|
20,019 |
|
|
|
5.21 |
% |
Commercial and industrial |
|
|
709,979 |
|
|
|
20,975 |
|
|
|
5.96 |
% |
|
|
353,686 |
|
|
|
9,869 |
|
|
|
5.63 |
% |
Construction and land |
|
|
444,371 |
|
|
|
9,512 |
|
|
|
4.32 |
% |
|
|
535,241 |
|
|
|
6,706 |
|
|
|
2.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,852,466 |
|
|
|
47,718 |
|
|
|
5.19 |
% |
|
|
1,664,476 |
|
|
|
36,594 |
|
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (2) |
|
|
5,878,311 |
|
|
|
159,303 |
|
|
|
5.46 |
% |
|
|
5,858,009 |
|
|
|
160,349 |
|
|
|
5.52 |
% |
Mortgage-backed securities |
|
|
1,286,794 |
|
|
|
20,277 |
|
|
|
3.18 |
% |
|
|
2,495,194 |
|
|
|
41,789 |
|
|
|
3.38 |
% |
Interest-only strips (IOs) |
|
|
43,723 |
|
|
|
2,979 |
|
|
|
13.74 |
% |
|
|
44,820 |
|
|
|
3,034 |
|
|
|
13.65 |
% |
Investment securities |
|
|
92,005 |
|
|
|
229 |
|
|
|
0.50 |
% |
|
|
63,270 |
|
|
|
1,448 |
|
|
|
4.62 |
% |
Other interest-earning assets |
|
|
489,608 |
|
|
|
2,320 |
|
|
|
0.96 |
% |
|
|
661,933 |
|
|
|
3,685 |
|
|
|
1.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets/interest income |
|
|
7,790,441 |
|
|
$ |
185,108 |
|
|
|
4.79 |
% |
|
|
9,123,226 |
|
|
$ |
210,305 |
|
|
|
4.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets |
|
|
665,067 |
|
|
|
|
|
|
|
|
|
|
|
685,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,455,508 |
|
|
|
|
|
|
|
|
|
|
$ |
9,808,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
1,998,156 |
|
|
$ |
14,853 |
|
|
|
1.50 |
% |
|
$ |
1,678,246 |
|
|
$ |
16,430 |
|
|
|
1.97 |
% |
Brokered CDs |
|
|
2,225,721 |
|
|
|
34,589 |
|
|
|
3.13 |
% |
|
|
2,732,539 |
|
|
|
37,857 |
|
|
|
2.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,223,877 |
|
|
|
49,442 |
|
|
|
2.36 |
% |
|
|
4,410,785 |
|
|
|
54,287 |
|
|
|
2.48 |
% |
Repurchase agreements |
|
|
1,028,891 |
|
|
|
15,357 |
|
|
|
3.01 |
% |
|
|
1,898,535 |
|
|
|
31,762 |
|
|
|
3.37 |
% |
Advances from FHLB |
|
|
990,049 |
|
|
|
15,430 |
|
|
|
3.14 |
% |
|
|
1,368,914 |
|
|
|
26,894 |
|
|
|
3.96 |
% |
Other short-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
10,138 |
|
|
|
15 |
|
|
|
0.30 |
% |
Loans payable |
|
|
300,085 |
|
|
|
3,040 |
|
|
|
2.04 |
% |
|
|
329,823 |
|
|
|
3,325 |
|
|
|
2.03 |
% |
Notes payable |
|
|
512,556 |
|
|
|
13,214 |
|
|
|
5.16 |
% |
|
|
269,550 |
|
|
|
10,196 |
|
|
|
7.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities/interest expense |
|
|
7,055,458 |
|
|
$ |
96,483 |
|
|
|
2.76 |
% |
|
|
8,287,745 |
|
|
$ |
126,479 |
|
|
|
3.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits |
|
|
272,204 |
|
|
|
|
|
|
|
|
|
|
|
237,794 |
|
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities |
|
|
262,569 |
|
|
|
|
|
|
|
|
|
|
|
366,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities |
|
|
534,773 |
|
|
|
|
|
|
|
|
|
|
|
604,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
7,590,231 |
|
|
|
|
|
|
|
|
|
|
|
8,892,136 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
865,277 |
|
|
|
|
|
|
|
|
|
|
|
916,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
8,455,508 |
|
|
|
|
|
|
|
|
|
|
$ |
9,808,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
734,983 |
|
|
|
|
|
|
|
|
|
|
$ |
835,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a non-taxable equivalent basis |
|
|
|
|
|
$ |
88,625 |
|
|
|
|
|
|
|
|
|
|
$ |
83,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (3) |
|
|
|
|
|
|
|
|
|
|
2.03 |
% |
|
|
|
|
|
|
|
|
|
|
1.57 |
% |
Interest rate margin (4) |
|
|
|
|
|
|
|
|
|
|
2.29 |
% |
|
|
|
|
|
|
|
|
|
|
1.85 |
% |
Net interest-earning assets ratio (5) |
|
|
|
|
|
|
|
|
|
|
110.42 |
% |
|
|
|
|
|
|
|
|
|
|
110.08 |
% |
|
|
|
(1) |
|
Average loan balances include the average balance of non-accruing loans, on which
interest income is recognized when collected. Also, includes the average balance of GNMA
defaulted loans for which the Company has an unconditional buy-back option. |
|
(2) |
|
Interest income on loans includes $0.1 million and $0.4 million for the six month
periods ended June 30, 2011 and 2010, respectively, of income from prepayment penalties
related to the Companys loan portfolio. |
|
(3) |
|
Interest rate spread represents the difference between the weighted-average yield on
interest-earning assets and the weighted-average yield on interest-bearing liabilities. |
|
(4) |
|
Interest rate margin represents net interest income on an annualized basis as a
percentage of average interest-earning assets. |
|
(5) |
|
Net interest-earning assets ratio represents average interest-earning assets as a
percentage of average interest-bearing liabilities. |
75
The following table presents the extent to which changes in interest rates and changes in
volume of interest-earning assets and interest-bearing liabilities have affected Doral Financials
interest income and interest expense during the period indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii)
changes in rate (change in rate multiplied by prior year volume); and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has been allocated in proportion
to the absolute dollar amounts of the changes due to rate and volume.
Table D
Net Interest Income Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
|
2011 Compared to 2010 |
|
|
|
Increase (Decrease) Due To: |
|
(In thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
Interest Income Variance |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
114 |
|
|
$ |
208 |
|
|
$ |
322 |
|
Mortgage-backed securities |
|
|
(12,416 |
) |
|
|
3,095 |
|
|
|
(9,321 |
) |
Interest-only strips |
|
|
(2 |
) |
|
|
19 |
|
|
|
17 |
|
Investment securities |
|
|
228 |
|
|
|
(681 |
) |
|
|
(453 |
) |
Other interest-earning assets |
|
|
(13 |
) |
|
|
(512 |
) |
|
|
(525 |
) |
|
|
|
|
|
|
|
|
|
|
Total Interest Income Variance |
|
$ |
(12,089 |
) |
|
$ |
2,129 |
|
|
$ |
(9,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense Variance |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
(1,579 |
) |
|
$ |
(3,465 |
) |
|
$ |
(5,044 |
) |
Repurchase agreements |
|
|
(6,113 |
) |
|
|
(1,387 |
) |
|
|
(7,500 |
) |
Advances from FHLB |
|
|
(1,442 |
) |
|
|
(2,657 |
) |
|
|
(4,099 |
) |
Other short-term borrowings |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
Loans payable |
|
|
(151 |
) |
|
|
(27 |
) |
|
|
(178 |
) |
Notes payable |
|
|
3,005 |
|
|
|
(1,530 |
) |
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense Variance |
|
$ |
(6,282 |
) |
|
$ |
(9,068 |
) |
|
$ |
(15,350 |
) |
|
|
|
|
|
|
|
|
|
|
Net Interest Income Variance |
|
$ |
(5,807 |
) |
|
$ |
11,197 |
|
|
$ |
5,390 |
|
|
|
|
|
|
|
|
|
|
|
76
Table E
Net Interest Income Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended June 30, |
|
|
|
2011 Compared to 2010 |
|
|
|
Increase (Decrease) Due To: |
|
(In thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
Interest Income Variance |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
231 |
|
|
$ |
(1,277 |
) |
|
$ |
(1,046 |
) |
Mortgage-backed securities |
|
|
(30,936 |
) |
|
|
9,424 |
|
|
|
(21,512 |
) |
Interest-only strips |
|
|
(75 |
) |
|
|
20 |
|
|
|
(55 |
) |
Investment securities |
|
|
181 |
|
|
|
(1,400 |
) |
|
|
(1,219 |
) |
Other interest-earning assets |
|
|
(881 |
) |
|
|
(484 |
) |
|
|
(1,365 |
) |
|
|
|
|
|
|
|
|
|
|
Total Interest Income Variance |
|
$ |
(31,480 |
) |
|
$ |
6,283 |
|
|
$ |
(25,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense Variance |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
(2,434 |
) |
|
$ |
(2,411 |
) |
|
$ |
(4,845 |
) |
Repurchase agreements |
|
|
(14,320 |
) |
|
|
(2,085 |
) |
|
|
(16,405 |
) |
Advances from FHLB |
|
|
(7,059 |
) |
|
|
(4,405 |
) |
|
|
(11,464 |
) |
Other short-term borrowings |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(15 |
) |
Loans payable |
|
|
(325 |
) |
|
|
40 |
|
|
|
(285 |
) |
Notes payable |
|
|
6,493 |
|
|
|
(3,475 |
) |
|
|
3,018 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense Variance |
|
$ |
(17,653 |
) |
|
$ |
(12,343 |
) |
|
$ |
(29,996 |
) |
|
|
|
|
|
|
|
|
|
|
Net Interest Income Variance |
|
$ |
(13,827 |
) |
|
$ |
18,626 |
|
|
$ |
4,799 |
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is charged to earnings to bring the total allowance
for loan and lease losses to a level considered appropriate by management considering all losses
inherent in the portfolio and based on Doral Financials historical loss experience, current
delinquency rates, known and inherent risks in the loan portfolio, individual assessment of
significant impaired loans, the estimated value of the underlying collateral or discounted expected
cash flows, and an assessment of current economic conditions and emerging risks. While management
believes that the current allowance for loan and lease losses is adequate, future additions to the
allowance could be necessary if economic conditions change or if credit losses increase
substantially from those forecast by Doral Financial in determining the allowance. Unanticipated
increases in the allowance for loan and lease losses could materially affect Doral Financials net
income in future periods.
The provision for loan and lease losses for the second quarter of 2011, reflected a decrease of
$31.3 million compared to the second quarter of 2010. The second quarter 2011 provision for loan
and lease losses was the result of (i) new market information received increasing estimated losses
on loans evaluated individually for impairment in the second quarter, (ii) refinements made to the
loss reserving methodologies, and (iii) increased aging of the past due residential mortgage loans.
The June 2010 provision included a $12.6 million charge to reduce certain construction loans to
lower of cost or market when transferred to loans held for sale and an $8.0 million charge due to
increased severities on other real estate owned properties resulting from managements strategic
decision to accelerate OREO dispositions, in addition to higher provisions driven by higher
delinquencies in 2010 compared to 2011.
The provision for loan and lease losses for the six month period ended June 30, 2011 totaled $15.9
million compared to $58.5 million for the same period in 2010. The decrease of $42.6 million in the
provision was mainly related to the previously mentioned charges of $12.6 million for loans
reclassified to held for sale and $8.0 million for increased severities on OREO as well as higher
delinquencies which drove higher provisions in 2010 compared to 2011.
Please refer to the discussions under Non-performing assets and allowance for loan and lease
losses and Credit Risk below for further analysis of the allowance for loan and lease losses and
NPAs and related ratios.
77
NON-INTEREST INCOME (LOSS)
Table F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended |
|
|
Six month periods ending |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
Variance |
|
|
2011 |
|
|
2010 |
|
|
Variance |
|
Net other-than-temporary impairment losses |
|
$ |
(86 |
) |
|
$ |
|
|
|
$ |
(86 |
) |
|
$ |
(86 |
) |
|
$ |
(13,259 |
) |
|
$ |
13,173 |
|
Net gain on loans securitized and sold and capitalization of mortgage servicing |
|
|
9,026 |
|
|
|
3,605 |
|
|
|
5,421 |
|
|
|
14,568 |
|
|
|
6,956 |
|
|
|
7,612 |
|
Servicing income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees |
|
|
6,817 |
|
|
|
7,515 |
|
|
|
(698 |
) |
|
|
13,835 |
|
|
|
14,625 |
|
|
|
(790 |
) |
Late charges |
|
|
1,753 |
|
|
|
2,287 |
|
|
|
(534 |
) |
|
|
3,520 |
|
|
|
4,382 |
|
|
|
(862 |
) |
Prepayment penalties |
|
|
147 |
|
|
|
4 |
|
|
|
143 |
|
|
|
791 |
|
|
|
(5 |
) |
|
|
796 |
|
Other servicing fees |
|
|
298 |
|
|
|
238 |
|
|
|
60 |
|
|
|
456 |
|
|
|
472 |
|
|
|
(16 |
) |
Interest loss on serial notes and others |
|
|
(1,413 |
) |
|
|
(4,924 |
) |
|
|
3,511 |
|
|
|
(1,961 |
) |
|
|
(5,606 |
) |
|
|
3,645 |
|
Mark-to-market adjustment of servicing assets |
|
|
(3,059 |
) |
|
|
(6,474 |
) |
|
|
3,415 |
|
|
|
(3,199 |
) |
|
|
(8,478 |
) |
|
|
5,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing income (loss) |
|
|
4,543 |
|
|
|
(1,354 |
) |
|
|
5,897 |
|
|
|
13,442 |
|
|
|
5,390 |
|
|
|
8,052 |
|
Trading activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on IO valuation |
|
|
4,079 |
|
|
|
3,857 |
|
|
|
222 |
|
|
|
3,628 |
|
|
|
4,516 |
|
|
|
(888 |
) |
Gain (loss) on MSR economic hedge |
|
|
582 |
|
|
|
4,656 |
|
|
|
(4,074 |
) |
|
|
59 |
|
|
|
6,484 |
|
|
|
(6,425 |
) |
Loss on hedging derivatives |
|
|
(1,288 |
) |
|
|
(1,411 |
) |
|
|
123 |
|
|
|
(1,401 |
) |
|
|
(2,909 |
) |
|
|
1,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on trading activities |
|
|
3,373 |
|
|
|
7,102 |
|
|
|
(3,729 |
) |
|
|
2,286 |
|
|
|
8,091 |
|
|
|
(5,805 |
) |
Commissions, fees and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail banking fees |
|
|
7,067 |
|
|
|
7,199 |
|
|
|
(132 |
) |
|
|
14,073 |
|
|
|
14,342 |
|
|
|
(269 |
) |
Insurance agency commissions |
|
|
2,439 |
|
|
|
2,436 |
|
|
|
3 |
|
|
|
4,661 |
|
|
|
4,778 |
|
|
|
(117 |
) |
Other (loss) income |
|
|
695 |
|
|
|
571 |
|
|
|
124 |
|
|
|
3,884 |
|
|
|
3,907 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions, fees and other income |
|
|
10,201 |
|
|
|
10,206 |
|
|
|
(5 |
) |
|
|
22,618 |
|
|
|
23,027 |
|
|
|
(409 |
) |
Net loss on early repayment of debt |
|
|
(3,068 |
) |
|
|
(2,545 |
) |
|
|
(523 |
) |
|
|
(3,068 |
) |
|
|
(3,021 |
) |
|
|
(47 |
) |
Net gain (loss) on investment securities |
|
|
14,808 |
|
|
|
(137,204 |
) |
|
|
152,012 |
|
|
|
17,662 |
|
|
|
(110,790 |
) |
|
|
128,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss) |
|
$ |
38,797 |
|
|
$ |
(120,190 |
) |
|
$ |
158,987 |
|
|
$ |
67,422 |
|
|
$ |
(83,606 |
) |
|
$ |
151,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2011 vs. Second Quarter 2010 Non-interest income of $38.8 million
for the second quarter of 2011 increased by $159.0 million over the second quarter of 2010,
primarily due to the following:
|
|
An improvement in gain on sale of investment securities of $152.0 million. During the
second quarter of 2010 the Company recognized a loss on sale of securities of $137.2 million
driven by a loss of $136.7 million on the sale of $378.0 million of certain non-agency CMOs.
During the second quarter of 2011 the Company had a gain on sale of investment securities of
$14.8 million as a result of its deleveraging of the balance sheet. |
|
|
Servicing income increased $5.9 million related to an improvement in the mark to market
adjustment of the MSR of $3.4 million and higher servicing fees of $2.5 million. The
improvement in the value of the MSR was primarily due to a reduction in prepayment speeds. The
improvement in servicing fees was driven by lower interest losses of $3.5 million. During the
second quarter of 2010 the Company recognized an interest loss of $4.2 million related to the
repurchase of certain GNMA defaulted loans. This improvement was partially offset by lower
servicing fees of $1.0 million. |
Six Month Period Ended June 30, 2011 vs. Six Month Period Ended June 30, 2010 The
non-interest income of $67.4 million for the six month period ended June 30, 2011 reflects an
increase in total non-interest income of $151.0 million compared to non-interest loss of $83.6
million for the six month period ended June 30, 2010. Significant variances in non-interest income
for the six month period ended June 30, 2011 compared to the same period in 2010 were as follows:
78
|
|
An improvement in gain on sale of investment securities of $128.5 million. During the
second quarter of 2010 the Company recognized a loss on sale of securities of $137.2 million
driven by a loss of $136.7 million on the sale of $378.0 million of certain non-agency CMOs.
During the first semester of 2011 the Company had a gain on sale of investment securities of
$17.7 million as a result of its deleveraging of the balance sheet. |
|
|
An improvement in OTTI of $13.2 million. During 2010, there was a deterioration in
estimated future cash flows of non-agency CMOs resulting in an OTTI of $13.3 million. These
securities were sold during the second quarter of 2010 and the unrealized loss in OCI was
realized. OTTI of approximately $0.8 million recognized in 2011 was related to PR non-agency
CMOs. |
|
|
Servicing income increased $8.1 million related to an improvement in the mark to market
adjustment of the MSR of $5.3 million and higher servicing fees of $2.8 million. The
improvement in the value of the MSR was primarily due to a reduction in prepayment speeds. The
improvement in servicing fees was driven by lower interest losses of $3.6 million. During the
second quarter of 2010 the Company recognized an interest loss of $4.2 million related to the
repurchase of certain GNMA defaulted loans. This improvement was partially offset by lower
servicing fees of $0.8 million. |
NON-INTEREST EXPENSE
Table G
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six Month Periods Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
Variance |
|
|
2011 |
|
|
2010 |
|
|
Variance |
|
Compensation and benefits |
|
$ |
21,081 |
|
|
$ |
20,315 |
|
|
$ |
766 |
|
|
$ |
39,375 |
|
|
$ |
36,750 |
|
|
$ |
2,625 |
|
Professional services |
|
|
9,339 |
|
|
|
15,420 |
|
|
|
(6,081 |
) |
|
|
17,976 |
|
|
|
29,212 |
|
|
|
(11,236 |
) |
FDIC insurance expense |
|
|
3,797 |
|
|
|
5,574 |
|
|
|
(1,777 |
) |
|
|
8,153 |
|
|
|
10,765 |
|
|
|
(2,612 |
) |
Communication expenses |
|
|
3,636 |
|
|
|
4,056 |
|
|
|
(420 |
) |
|
|
7,639 |
|
|
|
8,000 |
|
|
|
(361 |
) |
Occupancy expenses |
|
|
4,786 |
|
|
|
4,322 |
|
|
|
464 |
|
|
|
9,126 |
|
|
|
8,303 |
|
|
|
823 |
|
EDP expenses |
|
|
3,024 |
|
|
|
2,878 |
|
|
|
146 |
|
|
|
6,299 |
|
|
|
6,657 |
|
|
|
(358 |
) |
Depreciation and amortization |
|
|
3,463 |
|
|
|
3,110 |
|
|
|
353 |
|
|
|
6,666 |
|
|
|
6,257 |
|
|
|
409 |
|
Taxes, other than payroll and income taxes |
|
|
2,923 |
|
|
|
2,591 |
|
|
|
332 |
|
|
|
5,799 |
|
|
|
5,155 |
|
|
|
644 |
|
Advertising |
|
|
1,748 |
|
|
|
4,073 |
|
|
|
(2,325 |
) |
|
|
2,746 |
|
|
|
5,571 |
|
|
|
(2,825 |
) |
Office expenses |
|
|
1,042 |
|
|
|
1,112 |
|
|
|
(70 |
) |
|
|
2,032 |
|
|
|
2,397 |
|
|
|
(365 |
) |
Corporate insurance |
|
|
1,490 |
|
|
|
1,264 |
|
|
|
226 |
|
|
|
3,060 |
|
|
|
2,526 |
|
|
|
534 |
|
Other |
|
|
2,995 |
|
|
|
4,552 |
|
|
|
(1,557 |
) |
|
|
6,910 |
|
|
|
8,334 |
|
|
|
(1,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,324 |
|
|
|
69,267 |
|
|
|
(9,943 |
) |
|
|
115,781 |
|
|
|
129,927 |
|
|
|
(14,146 |
) |
OREO expenses and other reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned expense |
|
|
2,061 |
|
|
|
23,414 |
|
|
|
(21,353 |
) |
|
|
4,023 |
|
|
|
28,011 |
|
|
|
(23,988 |
) |
Foreclosure expenses |
|
|
864 |
|
|
|
(74 |
) |
|
|
938 |
|
|
|
2,507 |
|
|
|
622 |
|
|
|
1,885 |
|
Reserve on claim receivable
from LBI |
|
|
|
|
|
|
10,819 |
|
|
|
(10,819 |
) |
|
|
|
|
|
|
10,819 |
|
|
|
(10,819 |
) |
Provisions for other credit
related expenses |
|
|
1,332 |
|
|
|
656 |
|
|
|
676 |
|
|
|
2,054 |
|
|
|
2,101 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,257 |
|
|
|
34,815 |
|
|
|
(30,558 |
) |
|
|
8,584 |
|
|
|
41,553 |
|
|
|
(32,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
63,581 |
|
|
$ |
104,082 |
|
|
$ |
(40,501 |
) |
|
$ |
124,365 |
|
|
$ |
171,480 |
|
|
$ |
(47,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2011 vs. Second Quarter 2010 Non-interest expense of $63.6 million
for the second quarter of 2011 decreased by $40.5 million, or 38.9% compared the second quarter of
2010. Significant variances in non-interest expense for the quarter ended June 30, 2011 compared to
the quarter ended June 30, 2010 were as follows:
|
|
A decrease of $10.8 million in the reserve for the Companys claim on Lehman Brothers Inc.
that was established in the second quarter of 2010. The claim was subsequently sold to a third
party. |
|
|
OREO expenses were $2.1 million in the second quarter of 2011 compared to $23.4 million for
the same period in 2010, a decrease of $21.4 million. Higher OREO expenses in 2010 were
related to an additional provision for OREO losses of $17.0 million established during the
second quarter of 2010 to recognize the effect of managements strategic decision to reduce
pricing |
79
|
|
to stimulate property sales, adjustments driven by lower values of certain OREO properties, and
higher maintenance costs to maintain the properties in saleable condition. |
|
|
A decrease of $6.1 million in professional services was driven by lower defense litigation
costs of $4.2 million, lower advisory services of $0.5 million related to the dissolution of
Doral Holdings and Doral Holdings L.P., and lower advisory services of $1.3 million in 2011
compared to 2010 which were incurred in relation to the sale of certain construction loans. |
|
|
There was a higher advertising expense in 2010 of $2.3 million compared to the second
quarter of 2011, related to campaigns conducted to gain market share in deposits and mortgage
originations subsequent to the local market bank failures and asset acquisition in April 2010. |
|
|
Lower FDIC insurance expense of $1.8 million related to a lower deposit base and a change
in the method of computing the assessment. |
|
|
An increase of $1.6 million in credit related costs was due to an increase of $0.9 million
in foreclosure expenses and $0.9 million in the provision for negative escrow. |
Six Month Period Ended June 30, 2011 vs. Six Month Period Ended June 30, 2010
Non-interest expense of $124.4 million for the six month period ended June 30, 2011 decreased by
$47.1 million, or 27.5%, over the previous year. Significant variances in non-interest expense for
the six month period ended June 30, 2011 compared to the six month period ended June 30, 2010 were
as follows:
|
|
|
A decrease of $10.8 million in the reserve for the Companys claim on Lehman Brothers
Inc. that was established in the second quarter of 2010. The claim was subsequently sold to
a third party. |
|
|
|
|
OREO expenses were $4.0 million in 2011 compared to $28.0 million for the same period in
2010, a decrease of $24.0 million. Higher OREO expenses in 2010 were related to an
additional provision for OREO losses of $17.0 million established during the second quarter
of 2010 to recognize the effect of managements strategic decision to reduce pricing to
stimulate property sales, market value adjustments driven by lower values of certain OREO
properties, and higher maintenance costs to maintain the properties in saleable condition. |
|
|
|
|
A decrease of $11.2 million in professional services was driven by lower defense
litigation costs of $8.1 million, lower advisory services of $0.5 million related to the
dissolution of Doral Holdings and Doral Holdings L.P., and lower advisory services of $2.7
million in 2011 compared to 2010 which were incurred in relation to the sale of certain
construction loans as well as expenses incurred for the Companys participation in bidding
for FDIC assisted transactions in 2010. |
|
|
|
|
There was a higher advertising expense in 2010 of $2.8 million compared to 2011, related
to campaigns conducted to gain market share in deposits and mortgage originations
subsequent to the local market bank failures and asset acquisition in April 2010. |
|
|
|
|
Lower FDIC insurance expense of $2.6 million related to a lower deposit base and a
change in the method of computing the assessment. |
|
|
|
|
An increase of $2.6 million in stock based compensation was related to certain stock
incentive bonuses and tax benefits thereon. |
INCOME TAXES
On January 31, 2011, the Governor signed into law the Internal Revenue Code of 2011 (2011 Code).
Under the provisions of the 2011 Code, the maximum statutory corporate income tax rate is 30% for
years commenced after December 31, 2010 and ending before January 1, 2014. Notwithstanding, a
corporation may elect to remain subject to the 1994 Puerto Rico Tax Code, as amended (1994 Code)
for 2011 and the next four succeeding years, if it so elects by the time it files its income tax
return for 2011. The Company is evaluating the impact of the tax reform on its results of
operations including the election to remain subject to the 1994 Code through 2015. Nevertheless,
the Company recorded its deferred tax assets expected to reverse after 2015 at the 30.0% tax rate
required for all taxable earnings beginning in 2016 which is the latest year that it would be
required to convert to the 2011 Code. Puerto Rico deferred tax assets subject to the maximum
statutory tax rate and expected to reverse prior to 2016, together with any related valuation
allowance, are recorded at the 39.0% tax rate pursuant to the 1994 Code. Upon determination of
which alternative treatment will be followed the Company will adjust its deferred tax assets for
any required tax rate change, if applicable. Adoption of the 2011 Code as of June 30, 2011 would
represent an additional deferred tax expense of $8.4 million.
For the quarter and six month periods ended June 30, 2011, Doral Financial recognized income tax
expense of $2.9 million and $8.0 million, respectively, compared to an income tax expense of $4.5
million and $7.0 million for the comparable periods in 2010. The components of income tax expense
(benefit) are summarized below:
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Six month period ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Current income tax expense United States |
|
$ |
3,101 |
|
|
$ |
3,615 |
|
|
$ |
5,475 |
|
|
$ |
3,890 |
|
Deferred income tax (benefit) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
|
450 |
|
|
|
1,008 |
|
|
|
3,120 |
|
|
|
2,795 |
|
United States |
|
|
(680 |
) |
|
|
(136 |
) |
|
|
(627 |
) |
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax (benefit) expense |
|
|
(230 |
) |
|
|
872 |
|
|
|
2,493 |
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
2,871 |
|
|
$ |
4,487 |
|
|
$ |
7,968 |
|
|
$ |
7,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current income tax expense of $3.1 million and $5.5 million for the quarter and six month
periods ended June 30, 2011, respectively, was related to taxes on U.S. source income. The deferred
tax benefit of $0.2 million and deferred tax expense of $2.5 million for the quarter and six month
periods ended June 30, 2011 reflected reductions over the comparable periods in 2010 due to higher
taxes recognized in 2010 related to U.S. source income, as well as the impact of tax rate change on
the current period valuation allowance, partially offset by realization of operational deferred tax
assets. The deferred income tax expense of $3.1 million for the six months ended June 30, 2011 was
related to the net effect on the Companys deferred tax assets of (i) Puerto Rico tax legislation
approved in January 2011 lowering the effective tax rate, resulting in a deferred tax expense of
$18.8 million, (ii) the increased earnings expectation for profitable Puerto Rico entities which
resulted in a deferred tax benefit of $17.4 million, and (iii) net amortization of deferred taxes
of $1.7 million.
Refer to Note 23 of the accompanying financial statements for additional information related to the
Companys income taxes.
BALANCE SHEET AND OPERATING DATA ANALYSIS
LOAN PRODUCTION
Loan production includes loans internally originated by Doral Financial as well as residential
mortgage loans purchased from third parties with the related servicing rights. Purchases of
mortgage loans from third parties were $16.5 million and $30.0 million for the quarter and six
month periods ended June 30, 2011, respectively, compared to $39.7 million and $58.8 million, for
the corresponding 2010 periods, respectively.
81
The following table sets forth the number and dollar amount of Doral Financials loan
production for the periods indicated:
Table H
Loan Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
(Dollars in thousands, except for average |
|
2011 |
|
|
2010 |
|
initial loan balance) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
FHA/VA mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
378 |
|
|
|
|
|
|
|
378 |
|
|
|
422 |
|
|
|
|
|
|
|
422 |
|
Volume of loans |
|
$ |
50,704 |
|
|
$ |
|
|
|
$ |
50,704 |
|
|
$ |
58,136 |
|
|
$ |
|
|
|
$ |
58,136 |
|
Percent of total volume |
|
|
11 |
% |
|
|
|
% |
|
|
11 |
% |
|
|
15 |
% |
|
|
|
% |
|
|
15 |
% |
Average initial loan balance |
|
$ |
134,138 |
|
|
$ |
|
|
|
$ |
134,138 |
|
|
$ |
137,763 |
|
|
$ |
|
|
|
$ |
137,763 |
|
Conventional conforming mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
333 |
|
|
|
|
|
|
|
333 |
|
|
|
217 |
|
|
|
|
|
|
|
217 |
|
Volume of loans |
|
$ |
40,116 |
|
|
$ |
|
|
|
$ |
40,116 |
|
|
$ |
28,984 |
|
|
$ |
|
|
|
$ |
28,984 |
|
Percent of total volume |
|
|
9 |
% |
|
|
|
% |
|
|
9 |
% |
|
|
8 |
% |
|
|
|
% |
|
|
8 |
% |
Average initial loan balance |
|
$ |
120,469 |
|
|
$ |
|
|
|
$ |
120,469 |
|
|
$ |
133,567 |
|
|
$ |
|
|
|
$ |
133,567 |
|
Conventional non-conforming mortgage loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
171 |
|
|
|
4 |
|
|
|
175 |
|
|
|
493 |
|
|
|
|
|
|
|
493 |
|
Volume of loans |
|
$ |
28,811 |
|
|
$ |
2,323 |
|
|
$ |
31,134 |
|
|
$ |
72,269 |
|
|
$ |
|
|
|
$ |
72,269 |
|
Percent of total volume |
|
|
6 |
% |
|
|
1 |
% |
|
|
7 |
% |
|
|
19 |
% |
|
|
|
% |
|
|
19 |
% |
Average initial loan balance |
|
$ |
168,485 |
|
|
$ |
580,750 |
|
|
$ |
177,903 |
|
|
$ |
146,590 |
|
|
$ |
|
|
|
$ |
146,590 |
|
Construction development loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Volume of loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,861 |
|
|
$ |
2,861 |
|
Percent of total volume |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
1 |
% |
|
|
1 |
% |
Average initial loan balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
476,833 |
|
|
$ |
476,833 |
|
Disbursement under existing construction development loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume of loans |
|
$ |
3,021 |
|
|
$ |
418 |
|
|
$ |
3,439 |
|
|
$ |
2,300 |
|
|
$ |
1,498 |
|
|
$ |
3,798 |
|
Percent of total volume |
|
|
1 |
% |
|
|
|
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
% |
|
|
1 |
% |
Commercial loans(2)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
10 |
|
|
|
133 |
|
|
|
143 |
|
|
|
12 |
|
|
|
82 |
|
|
|
94 |
|
Volume of loans |
|
$ |
4,671 |
|
|
$ |
294,656 |
|
|
$ |
299,327 |
|
|
$ |
3,780 |
|
|
$ |
180,644 |
|
|
$ |
184,424 |
|
Percent of total volume |
|
|
1 |
% |
|
|
63 |
% |
|
|
64 |
% |
|
|
1 |
% |
|
|
48 |
% |
|
|
49 |
% |
Average initial loan balance |
|
$ |
467,100 |
|
|
$ |
2,215,459 |
|
|
$ |
2,093,201 |
|
|
$ |
315,000 |
|
|
$ |
2,202,976 |
|
|
$ |
1,961,957 |
|
Consumer loans (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
98 |
|
|
|
2 |
|
|
|
100 |
|
|
|
338 |
|
|
|
|
|
|
|
338 |
|
Volume of loans |
|
$ |
534 |
|
|
$ |
9 |
|
|
$ |
543 |
|
|
$ |
1,613 |
|
|
$ |
|
|
|
$ |
1,613 |
|
Percent of total volume |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Average initial loan balance |
|
$ |
5,449 |
|
|
$ |
4,500 |
|
|
$ |
5,427 |
|
|
$ |
4,772 |
|
|
$ |
|
|
|
$ |
4,772 |
|
Other (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
24 |
|
|
|
24 |
|
Volume of loans |
|
$ |
|
|
|
$ |
39,390 |
|
|
$ |
39,390 |
|
|
$ |
|
|
|
$ |
28,085 |
|
|
$ |
28,085 |
|
Percent of total volume |
|
|
|
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
|
% |
|
|
7 |
% |
|
|
7 |
% |
Average initial loan balance |
|
$ |
|
|
|
$ |
5,627,143 |
|
|
$ |
5,627,143 |
|
|
$ |
|
|
|
$ |
1,170,208 |
|
|
$ |
1,170,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
990 |
|
|
|
146 |
|
|
|
1,136 |
|
|
|
1,482 |
|
|
|
112 |
|
|
|
1,594 |
|
Volume of loans |
|
$ |
127,857 |
|
|
$ |
336,796 |
|
|
$ |
464,653 |
|
|
$ |
167,082 |
|
|
$ |
213,088 |
|
|
$ |
380,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $70,000 and $87,000 in second mortgages for the quarters ended June 30,
2011 and 2010, respectively. |
|
(2) |
|
Commercial and consumer lines of credit are included in the loan production
according to the credit limit approved. |
|
(3) |
|
Includes commercial real estate and commercial and industrial loans. |
|
(4) |
|
Consists of multifamily loans. |
82
The following table sets forth the number and dollar amount of Doral Financials loan production
for the periods indicated:
Table I
Loan Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended June 30, |
|
(Dollars in thousands, except for average |
|
2011 |
|
|
2010 |
|
initial loan balance) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
FHA/VA mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
762 |
|
|
|
|
|
|
|
762 |
|
|
|
804 |
|
|
|
|
|
|
|
804 |
|
Volume of loans |
|
$ |
100,125 |
|
|
$ |
|
|
|
$ |
100,125 |
|
|
$ |
109,623 |
|
|
$ |
|
|
|
$ |
109,623 |
|
Percent of total volume |
|
|
12 |
% |
|
|
|
% |
|
|
12 |
% |
|
|
16 |
% |
|
|
|
% |
|
|
16 |
% |
Average initial loan balance |
|
$ |
131,398 |
|
|
$ |
|
|
|
$ |
131,398 |
|
|
$ |
136,347 |
|
|
$ |
|
|
|
$ |
136,347 |
|
Conventional conforming mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
645 |
|
|
|
|
|
|
|
645 |
|
|
|
415 |
|
|
|
|
|
|
|
415 |
|
Volume of loans |
|
$ |
77,699 |
|
|
$ |
|
|
|
$ |
77,699 |
|
|
$ |
51,359 |
|
|
$ |
|
|
|
$ |
51,359 |
|
Percent of total volume |
|
|
10 |
% |
|
|
|
% |
|
|
10 |
% |
|
|
8 |
% |
|
|
|
% |
|
|
8 |
% |
Average initial loan balance |
|
$ |
120,464 |
|
|
$ |
|
|
|
$ |
120,464 |
|
|
$ |
123,756 |
|
|
$ |
|
|
|
$ |
123,756 |
|
Conventional non-conforming mortgage loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
398 |
|
|
|
4 |
|
|
|
402 |
|
|
|
1,044 |
|
|
|
|
|
|
|
1,044 |
|
Volume of loans |
|
$ |
66,208 |
|
|
$ |
2,323 |
|
|
$ |
68,531 |
|
|
$ |
166,115 |
|
|
$ |
|
|
|
$ |
166,115 |
|
Percent of total volume |
|
|
8 |
% |
|
|
|
% |
|
|
8 |
% |
|
|
25 |
% |
|
|
|
% |
|
|
25 |
% |
Average initial loan balance |
|
$ |
166,352 |
|
|
$ |
580,750 |
|
|
$ |
170,475 |
|
|
$ |
159,114 |
|
|
$ |
|
|
|
$ |
159,114 |
|
Construction development loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Volume of loans |
|
$ |
|
|
|
$ |
3,600 |
|
|
$ |
3,600 |
|
|
$ |
|
|
|
$ |
2,861 |
|
|
$ |
2,861 |
|
Percent of total volume |
|
|
|
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
% |
|
|
1 |
% |
|
|
1 |
% |
Average initial loan balance |
|
$ |
|
|
|
$ |
3,600,000 |
|
|
$ |
3,600,000 |
|
|
$ |
|
|
|
$ |
476,833 |
|
|
$ |
476,833 |
|
Disbursement under existing construction development loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume of loans |
|
$ |
3,528 |
|
|
$ |
1,956 |
|
|
$ |
5,484 |
|
|
$ |
4,918 |
|
|
$ |
1,771 |
|
|
$ |
6,689 |
|
Percent of total volume |
|
|
1 |
% |
|
|
|
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
% |
|
|
1 |
% |
Commercial loans(2)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
18 |
|
|
|
185 |
|
|
|
203 |
|
|
|
21 |
|
|
|
153 |
|
|
|
174 |
|
Volume of loans |
|
$ |
6,377 |
|
|
$ |
509,864 |
|
|
$ |
516,241 |
|
|
$ |
6,587 |
|
|
$ |
285,182 |
|
|
$ |
291,769 |
|
Percent of total volume |
|
|
1 |
% |
|
|
62 |
% |
|
|
63 |
% |
|
|
1 |
% |
|
|
43 |
% |
|
|
44 |
% |
Average initial loan balance |
|
$ |
354,278 |
|
|
$ |
2,756,022 |
|
|
$ |
2,543,059 |
|
|
$ |
313,667 |
|
|
$ |
1,863,935 |
|
|
$ |
1,676,833 |
|
Consumer loans (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
238 |
|
|
|
2 |
|
|
|
240 |
|
|
|
435 |
|
|
|
|
|
|
|
435 |
|
Volume of loans |
|
$ |
1,317 |
|
|
$ |
9 |
|
|
$ |
1,326 |
|
|
$ |
2,274 |
|
|
$ |
|
|
|
$ |
2,274 |
|
Percent of total volume |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Average initial loan balance |
|
$ |
5,534 |
|
|
$ |
4,500 |
|
|
$ |
5,525 |
|
|
$ |
5,227 |
|
|
$ |
|
|
|
$ |
5,227 |
|
Other (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
1 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
28 |
|
|
|
28 |
|
Volume of loans |
|
$ |
2,348 |
|
|
$ |
39,390 |
|
|
$ |
41,738 |
|
|
$ |
|
|
|
$ |
38,535 |
|
|
$ |
38,535 |
|
Percent of total volume |
|
|
|
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
|
% |
|
|
6 |
% |
|
|
6 |
% |
Average initial loan balance |
|
$ |
2,348,000 |
|
|
$ |
5,627,143 |
|
|
$ |
5,217,250 |
|
|
$ |
|
|
|
$ |
1,376,250 |
|
|
$ |
1,376,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
2,062 |
|
|
|
199 |
|
|
|
2,261 |
|
|
|
2,719 |
|
|
|
187 |
|
|
|
2,906 |
|
Volume of loans |
|
$ |
257,602 |
|
|
$ |
557,142 |
|
|
$ |
814,744 |
|
|
$ |
340,876 |
|
|
$ |
328,349 |
|
|
$ |
669,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $70,000 and $0.4 million in second mortgages for the six month periods
ended June 30, 2011 and June 30, 2010, respectively. |
|
(2) |
|
Commercial and consumer lines of credit are included in the loan production
according to the credit limit approved. |
|
(3) |
|
Includes commercial real estate and commercial and industrial loans. |
|
(4) |
|
Consists of multifamily loans. |
83
Loan production increased $84.5 million, or 22.2%, in the second quarter of 2011, and $145.5
million, or 21.7%, for the six month period ended June 30, 2011, when compared to the corresponding
2010 periods. For the second quarter of 2011, the higher volume was mainly driven by an increase
of approximately $114.9 million in commercial and industrial loans principally originated by the Companys U.S.
lending unit, an increase of $11.3 million in multifamily residential mortgages and an increase of
$11.1 million in conventional conforming mortgage loans originated by the Puerto Rico mortgage
lending unit in the 2011 second quarter. These increases were partially offset by a decline of
$41.1 million and $7.4 million in the origination of conventional non-conforming loans and FHA/VA
loans, respectively, by the Companys Puerto Rico mortgage lending unit. For the period ended June 30, 2011, the
higher volume was mainly attributable to an increase of approximately $224.5 million in commercial
loans originated principally by the Companys U.S. lending unit, an increase of $26.3 million in the
origination of conventional conforming mortgage loans, which was partially offset by a decrease of
approximately $97.6 million and $9.5 million in the origination of conventional non-conforming
mortgage loans and FHA/VA loans, respectively, by the Puerto Rico mortgage lending unit.
The U.S. based middle market syndicated lending strategy is to acquire $5.0 million to $15.0
million participation interests in U.S. mainland companies that are first underwritten by money
center or regional banks, and re-underwritten by the Companys U.S. based syndicated lending unit.
The decrease in Doral Financials originated loans, exclusive of the U.S. based syndicated
commercial lending and construction loans, is due to a number of factors including continuing
challenging economic conditions in Puerto Rico, competition from other financial institutions, and
changes in laws and regulations.
A substantial portion of Doral Financials total residential mortgage loan originations has
consistently been composed of refinancing transactions. For the six month periods ended June 30,
2011 and 2010 refinancing transactions represented approximately 65% and 87%, respectively, of the
total dollar volume of internally originated mortgage loans. Doral Financials future results could
be adversely affected by a significant increase in mortgage interest rates that may reduce
refinancing activity. However, the Company believes that refinancing activity in Puerto Rico is
less sensitive to interest rate changes than in the mainland United States because a significant
number of refinance loans in the Puerto Rico mortgage market are made for debt consolidation
purposes rather than interest savings due to lower rates.
The following table sets forth the sources of Doral Financials loan production as a percentage of
total loan originations for the periods indicated:
Table J
Loan Origination Sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended June 30, |
|
|
2011 |
|
2010 |
|
|
PR |
|
US |
|
Total |
|
PR |
|
US |
|
Total |
Consumer |
|
|
27 |
% |
|
|
|
% |
|
|
27 |
% |
|
|
43 |
% |
|
|
|
% |
|
|
43 |
% |
Wholesale (1) |
|
|
4 |
% |
|
|
|
% |
|
|
4 |
% |
|
|
6 |
% |
|
|
3 |
% |
|
|
9 |
% |
Housing Developments (2) |
|
|
|
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
% |
|
|
1 |
% |
Commercial and Industrial |
|
|
1 |
% |
|
|
62 |
% |
|
|
63 |
% |
|
|
|
% |
|
|
39 |
% |
|
|
39 |
% |
Other (3) |
|
|
|
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
1 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
32 |
% |
|
|
68 |
% |
|
|
100 |
% |
|
|
51 |
% |
|
|
49 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refers to purchases of mortgage loans from other financial institutions and mortgage
lenders. |
|
(2) |
|
Includes new construction development loans and the disbursement of existing
construction development loans. |
|
(3) |
|
Refers to commercial real estate, consumer and multifamily loans originated through
the banking subsidiaries. |
MORTGAGE LOAN SERVICING
Doral Financials principal source of servicing rights has traditionally been sales of loans from
its internal loan production. However, Doral Financial has also purchased mortgage loans and
mortgage loan servicing rights, though not in recent periods. Doral Financial intends to continue
growing its mortgage-servicing portfolio primarily by internal loan originations, but may also
continue to seek and consider attractive opportunities for wholesale purchases of loans with the
related servicing rights and bulk purchases of servicing rights from third parties.
84
The following table sets forth certain information regarding the total mortgage loan-servicing
portfolio of Doral Financial for the periods indicated:
Table K
Loans Serviced For Third Parties
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
(Dollars in Thousands, Except for Average Size of Loans Serviced) |
|
2011 |
|
|
2010 |
|
Composition of Portfolio Serviced for Third Parties at Period End: |
|
|
|
|
|
|
|
|
GNMA |
|
$ |
2,455,564 |
|
|
$ |
2,272,527 |
|
FHLMC/FNMA |
|
|
2,748,411 |
|
|
|
2,943,897 |
|
Other conventional mortgage loans(1)(2) |
|
|
2,841,855 |
|
|
|
3,118,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio serviced for third parties |
|
$ |
8,045,830 |
|
|
$ |
8,335,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity of Portfolio Serviced for Third Parties: |
|
|
|
|
|
|
|
|
Beginning servicing portfolio |
|
$ |
8,208,060 |
|
|
$ |
8,655,613 |
|
Additions to servicing portfolio |
|
|
167,538 |
|
|
|
167,244 |
|
Servicing released due to repurchases |
|
|
(35,094 |
) |
|
|
(84,647 |
) |
MSRs sales |
|
|
|
|
|
|
(24,045 |
) |
Run-off (3) |
|
|
(294,674 |
) |
|
|
(378,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending servicing portfolio |
|
$ |
8,045,830 |
|
|
$ |
8,335,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Data Regarding Mortgage Loans Serviced for Third Parties: |
|
|
|
|
|
|
|
|
Number of loans |
|
|
96,909 |
|
|
|
99,760 |
|
Weighted-average interest rate |
|
|
6.13 |
% |
|
|
6.26 |
% |
Weighted-average remaining maturity (months) |
|
|
237 |
|
|
|
239 |
|
Weighted-average gross servicing fee rate |
|
|
0.41 |
% |
|
|
0.41 |
% |
Average servicing portfolio (4) |
|
$ |
8,126,624 |
|
|
$ |
8,512,746 |
|
Principal prepayments |
|
$ |
207,361 |
|
|
$ |
222,161 |
|
Constant prepayment rate |
|
|
4.86 |
% |
|
|
4.96 |
% |
Average size of loans |
|
$ |
83,018 |
|
|
$ |
83,554 |
|
Servicing assets, net |
|
$ |
115,785 |
|
|
$ |
113,005 |
|
Mortgage-servicing advances (5) |
|
$ |
54,011 |
|
|
$ |
41,609 |
|
|
|
|
|
|
|
|
|
|
Delinquent Mortgage Loans and Pending Foreclosures at Period End: |
|
|
|
|
|
|
|
|
60-89 days past due |
|
|
2.53 |
% |
|
|
2.60 |
% |
90 days or more past due |
|
|
5.85 |
% |
|
|
5.10 |
% |
|
|
|
|
|
|
|
Total delinquencies excluding foreclosures |
|
|
8.38 |
% |
|
|
7.70 |
% |
|
|
|
|
|
|
|
Foreclosures pending |
|
|
3.54 |
% |
|
|
2.99 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $4.6 billion and $4.5 billion of mortgage loans owned by Doral Financial at
June 30, 2011 and 2010, respectively. |
|
(2) |
|
Includes portfolios of $125.1 million and $0.1 million at June 30, 2011 and 2010,
respectively, of delinquent FHA/VA and conventional mortgage loans sold to third parties. |
|
(3) |
|
Run-off refers to regular amortization of loans, prepayments and foreclosures. |
|
(4) |
|
Excludes the average balance of mortgage loans owned by Doral Financial of $4.5
billion and $4.5 billion at June 30, 2011 and 2010, respectively. Includes reserves for
possible losses on P&I advances of $8.8 million and $5.5 million at June 30, 2011 and 2010,
respectively. |
Substantially all of the mortgage loans in Doral Financials servicing portfolio are secured
by single (one-to-four) family residences located in Puerto Rico. At June 30, 2011 and 2010, less
than one percent of Doral Financials mortgage-servicing portfolio was related to mortgages secured
by real property located on the U.S. mainland.
85
The main component of Doral Financials servicing income is loan servicing fees, which depend on
the type of mortgage loan being serviced. The servicing fees on residential mortgage loans
generally range from 0.25% to 0.50% of the outstanding principal balance of the serviced loan.
The amount of principal prepayments on mortgage loans serviced for third parties by Doral Financial
was $0.5 million for the six month period ended June 30, 2011 and $0.2 billion for the
corresponding 2010 period. Total delinquencies excluding foreclosures increased from 7.70% to 8.38%
from June 30, 2010 to June 30, 2011 as a result of the economic recession and general deterioration
of the mortgage sector, while pending foreclosures increased from 2.99% to 3.54% from June 30, 2010
to June 30, 2011. The Company does not expect significant losses related to these delinquencies
since it has a reserve for losses for loans under recourse agreements and for other non-recourse
loans has not experienced significant losses in the past.
As part of its servicing responsibilities, in some servicing agreements, Doral Financial is
required to advance the scheduled payments of principal or interest whether or not collected from
the underlying borrower. While Doral Financial generally recovers funds advanced pursuant to these
arrangements within 30 days, it must absorb the cost of funding the advances during the time the
advance is outstanding. In the past, Doral Financial sold pools of delinquent FHA and VA and
conventional mortgage loans. Under these arrangements, Doral Financial is required to advance the
scheduled payments whether or not collected from the underlying borrower. While Doral Financial
expects to recover a significant portion of the amounts advanced through foreclosure or, in the
case of FHA and VA loans, under the applicable FHA and VA insurance and guarantee programs, the
amounts advanced tend to be greater than normal arrangements because of the large number of
delinquent loans.
LIQUIDITY AND CAPITAL RESOURCES
Doral Financial has an ongoing need for capital to finance its lending, servicing and investing
activities. Doral Financials cash requirements arise mainly from loan originations and purchases,
purchases and holding of securities, repayment of debt upon maturity, payment of operating and
interest expenses, servicing advances and loan repurchases pursuant to recourse or warranty
obligations. Sources of funds include deposits, advances from FHLB and other borrowings, proceeds
from the sale of loans, and of certain available for sale investment securities and other assets,
payment from loans held on the balance sheet, and cash income from assets owned, including payments
from owned mortgage servicing rights and interest only strips. The Companys Asset and Liability
Committee (ALCO) establishes and monitors liquidity guidelines to ensure the Companys ability to
meet these needs. Doral Financial currently has and anticipates that it will continue to have
adequate liquidity, financing arrangements and capital resources to finance its operations in the
ordinary course of business.
Liquidity of the Holding Company
The holding companys principal uses of funds are the payment of its obligations, primarily the
payment of principal and interest on its debt obligations. The holding company no longer directly
funds any mortgage banking activities. Beyond the amount of unencumbered liquid assets at the
holding company, the principal sources of funds for the holding company are principal and interest
payments on the portfolio of loans, securities retained on its balance sheet and dividends from its
subsidiaries, including Doral Bank PR, Doral Bank NY and Doral Insurance Agency. The existing cease
and desist order applicable to the holding company requires prior regulatory approval for the
payment of any dividends from Doral Bank PR to the holding company. In addition, various federal
and Puerto Rico statutes and regulations limit the amount of dividends that the Companys banking
and other subsidiaries may pay without regulatory approval. No restrictions exist on the dividends
available from Doral Insurance Agency, other than those generally applicable under the Puerto Rico
corporation law.
Doral Financial has not paid dividends on the Companys common stock since April 2006.
On March 20, 2009, the Company announced that in order to preserve capital the Board of Directors
approved the suspension of the payment of dividends on all of its outstanding series of cumulative
and non-cumulative preferred stock. The suspension of dividends is effective and commenced with the
dividends for the month of April 2009 for Doral Financials noncumulative preferred stock and the
dividends for the second quarter of 2009 for Doral Financials cumulative preferred stock.
Liquidity is managed at the holding company level that owns the banking and non-banking
subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries.
The following items have impacted the Companys liquidity, funding activities and strategies during
2011 and 2010:
|
|
|
changes in short-term borrowings and deposits in the normal course of business; |
|
|
|
|
repayment of certain long-term callable certificate of deposits; |
|
|
|
|
sales of securities; |
86
|
|
|
early repayment of debt; |
|
|
|
|
adoption of an initiative to lengthen the brokered certificates term to structurally
reduce interest rate sensitivity; |
|
|
|
|
capital contributions to Doral Bank; |
|
|
|
|
suspension of payment of dividends on outstanding preferred stock; |
|
|
|
|
prepayment of FDIC insurance assessments for the years 2010-2012; |
|
|
|
|
repurchase of GNMA defaulted loans in 2010; |
|
|
|
|
inducement on preferred stock conversions; |
|
|
|
|
capital raise of $171.0 million in the second quarter of 2010; |
|
|
|
|
efforts to increase retail deposits in the wake of failed Puerto Rico banks; and |
|
|
|
|
on July 8, 2010, the Company entered into a collateralized loan arrangement in which
$450.0 million of U.S. based commercial loans are funded by $250.0 million from a third
party paying 3-month LIBOR plus 1.85%, and $200.0 million by Doral. The entity holding the
loans is consolidated by Doral and the third party financing is reported as a note payable.
The third party funding provides an additional source of liquidity for the Companys US
operations. |
The following sections provide further information on the Companys major funding activities and
needs. Also, refer to the consolidated statements of cash flows in the accompanying Consolidated
Financial Statements for further information.
Liquidity of the Banking Subsidiaries
Doral Financials liquidity and capital position at the holding company differ from the liquidity
and capital positions of the Companys banking subsidiaries. Doral Financials banking subsidiaries
rely primarily on deposits, including brokered deposits, borrowings under advances from FHLB and
repurchase agreements secured by pledges of their mortgage loans and mortgage-backed securities and
other borrowings. In periods previous to June 30, 2011, the Company has used as their primary
sources of liquidity term notes backed by FHLB letters of credit and auction term funds to
depository institutions granted by the Federal Reserve under Term Auction Facility (TAF). The
banking subsidiaries have significant investments in loans and investment securities which,
together with the owned mortgage servicing rights, serve as a source of cash from interest and
principal received from loan customers. To date, these sources of liquidity for Doral Financials
banking subsidiaries have not been materially adversely impacted by the current challenging
liquidity conditions in the U.S. mortgage and credit markets.
Cash Sources and Uses
Doral Financials sources of cash as of June 30, 2011 include retail and commercial deposits,
borrowings under advances from FHLB, borrowings from the Federal Reserve, repurchase financing
agreements, principal repayments and sales of loans and securities.
Management does not contemplate material uncertainties in the rolling over of deposits, both retail
and wholesale, and is not engaged in capital expenditures that would materially affect the capital
and liquidity positions. In addition, the Companys banking subsidiaries maintain borrowing
facilities with the FHLB and at the discount window of the Federal Reserve, and have a considerable
amount of collateral that can be used to raise funds under these facilities.
Doral Financials uses of cash as of June 30, 2011 include origination and purchase of loans,
purchase of investment securities, repayment of obligations as they become due, dividend payments
related to the preferred stock (which were suspended by the Companys Board of Directors on March
2009 effective during the second quarter of 2009), and other operational needs. The Company also is
required to deposit cash or qualifying securities to meet margin requirements. To the extent that
the value of securities previously pledged as collateral declines because of changes in interest
rates, a liquidity crisis or any other factors, the Company will be required to deposit additional
cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.
87
Primary Sources of Cash
The following table shows Doral Financials sources of borrowings and the related average interest
rates as of June 30, 2011 and December 31, 2010:
Table L
Sources Of Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
As of December 31, 2010 |
|
|
Amount |
|
Average |
|
Amount |
|
Average |
(Dollars in thousands) |
|
Outstanding |
|
Rate |
|
Outstanding |
|
Rate |
Deposits |
|
$ |
4,302,792 |
|
|
|
1.85 |
% |
|
$ |
4,618,475 |
|
|
|
2.18 |
% |
Repurchase Agreements |
|
|
442,300 |
|
|
|
2.55 |
% |
|
|
1,176,800 |
|
|
|
3.10 |
% |
Advances from FHLB |
|
|
1,342,849 |
|
|
|
3.05 |
% |
|
|
901,420 |
|
|
|
3.49 |
% |
Loans Payable |
|
|
294,623 |
|
|
|
2.00 |
% |
|
|
304,035 |
|
|
|
1.95 |
% |
Notes Payable |
|
|
510,430 |
|
|
|
4.78 |
% |
|
|
513,958 |
|
|
|
4.91 |
% |
As of June 30, 2011, Doral Financials banking subsidiaries held approximately $4.0 billion in
interest-bearing deposits at a weighted-average interest rate of 1.99%. For additional information
on the Companys sources of borrowings please refer to Notes 17 to 22 of the consolidated financial
statements accompanying this Quarterly Report on Form 10-Q.
In January 2011, the Company entered into an agreement with the FHLB to exchange $555.4 million of
its non-callable term advances, reducing the average contractual interest rate on those advances to
1.7% from 4.1%, and the effective yield to 2.9% from 4.1%, and extending the average maturities to
39 months from 14 months. This transaction resulted in a $22.0 million fee paid to the FHLB, which
is deferred and amortized over the term of the borrowings.
During the second quarter of 2011 the Company increased its FHLB advances, using the proceeds to repay securities sold under agreements to
repurchase from the FHLB, reducing contractual interest rates from
4.2% to 1.9%, and the average effective interest rate from 4.1% to 3.7%, and extending average maturity from 2.3 years to 4.0 years. The transaction resulted in a $40.2 million
fee which is capitalized and amortized as a yield adjustment. The proceeds from the increase in FHLB advances were used to repay other repurchase agreements, fund new loans, or were retained in cash.
The following table presents the average balance and the annualized average rate paid on each
deposit type for the periods indicated:
Table M
Average Deposit Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
Year Ended |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
(Dollars in thousands) |
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
Certificates of deposit |
|
$ |
674,457 |
|
|
|
2.13 |
% |
|
$ |
634,924 |
|
|
|
2.48 |
% |
Brokered certificates of deposits |
|
|
2,216,458 |
|
|
|
3.14 |
% |
|
|
2,645,028 |
|
|
|
2.89 |
% |
Regular passbook savings |
|
|
408,426 |
|
|
|
1.04 |
% |
|
|
380,534 |
|
|
|
1.46 |
% |
NOW accounts and other transaction accounts |
|
|
414,737 |
|
|
|
0.94 |
% |
|
|
379,100 |
|
|
|
1.31 |
% |
Money market accounts |
|
|
509,799 |
|
|
|
1.48 |
% |
|
|
416,269 |
|
|
|
1.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing |
|
|
4,223,877 |
|
|
|
2.36 |
% |
|
|
4,455,855 |
|
|
|
2.49 |
% |
Non-interest bearing |
|
|
272,204 |
|
|
|
|
% |
|
|
249,991 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
4,496,081 |
|
|
|
2.22 |
% |
|
$ |
4,705,846 |
|
|
|
2.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
88
The following table sets forth the maturities of certificates of deposit having principal amounts
of $100,000 or more at June 30, 2011.
Table N
Certificates of Deposits Maturities
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
Certificates of deposit maturing: |
|
|
|
|
Three months or less |
|
$ |
249,736 |
|
Over three through six months |
|
|
300,211 |
|
Over six through twelve months |
|
|
493,281 |
|
Over twelve months |
|
|
1,341,188 |
|
|
|
|
|
Total |
|
$ |
2,384,416 |
|
|
|
|
|
The amounts in Table N include $2.0 billion in brokered deposits issued in denominations
greater than $250,000 to broker-dealers, but within the applicable FDIC insurance limit of
$250,000.
As of June 30, 2011 and December 31, 2010, Doral Financials banking subsidiaries had approximately
$2.0 billion and $2.4 billion, respectively, in brokered deposits. Brokered deposits are used by
the Companys banking subsidiaries as a source of long-term funds, and Doral Financials banking
subsidiaries have traditionally been able to replace maturing brokered deposits. Brokered deposits,
however, are generally considered by some a less stable source of funding than deposits obtained
through retail bank branches. Brokered-deposit investors are generally more sensitive to interest
rates and sometimes move funds from one depository institution to another based on minor
differences in rates offered on deposits.
The Companys banking subsidiaries, as members of the FHLB, have access to collateralized
borrowings from the FHLB up to a maximum of 30% of total assets. In addition, the FHLB makes
available additional borrowing capacity in the form of repurchase agreements on qualifying high
grade securities. Advances and reimbursement obligations with respect to letters of credit must be
secured by qualifying assets with a market value of 100% of the advances or reimbursement
obligations. As of June 30, 2011, Doral Financials banking subsidiaries had $1.3 billion in
outstanding advances from FHLB at a weighted-average interest rate cost of 3.05%. Please refer to
Note 19 to the consolidated financial statements accompanying this Quarterly Report on Form 10-Q
for additional information regarding such advances.
The Company also derives liquidity from the sale of mortgage loans in the secondary mortgage
markets. The U.S. (including Puerto Rico) secondary mortgage market is the most liquid in the world
in large part because of the sale or guarantee programs maintained by FHA, VA, HUD, FNMA and FHLMC.
To the extent these programs are curtailed or the standard for insuring or selling loans under such
programs is materially increased, or, for any reason, Doral Financial were to fail to qualify for
such programs, Doral Financials ability to sell mortgage loans and consequently its liquidity
would be materially adversely affected.
Other Uses of Cash
Servicing agreements relating to the MBS programs of FNMA, FHLMC and GNMA, and to mortgage loans
sold to certain other investors, require the Company to advance funds to make scheduled payments of
principal, interest, taxes and insurance, if such payments have not been received from the
borrowers. While the Company generally recovers funds advanced pursuant to these arrangements
within 30 days, it must absorb the cost of funding the advances during the time the advance is
outstanding. For the six month period ended June 30, 2011, the monthly average amount of funds
advanced by the Company under such servicing agreements was approximately $66.7 million, compared
to $45.8 million for the corresponding 2010 period, and $62.3 million for the fourth quarter of
2010. To the extent the mortgage loans underlying the Companys servicing portfolio experience
increased delinquencies, the Company would be required to dedicate additional cash resources to
comply with its obligation to advance funds as well as incur additional administrative costs
related to increases in collection efforts. In the past, the Company sold pools of delinquent FHA
and VA and conventional mortgage loans. Under these arrangements, the Company is required to
advance the scheduled payments whether or not collected from the underlying borrower. While the
Company expects to recover the amounts advanced through foreclosure or, in the case of FHA/VA
loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend
to be greater than normal arrangements because of the delinquent status of the loans. As of June
30, 2011 and December 31, 2010, the outstanding principal balance of such delinquent loans was
$125.1 million and $139.6 million, respectively, and the aggregate monthly amount of funds advanced
by the Company was $16.2 million and $15.4 million, respectively.
89
When the Company sells mortgage loans to third parties, which serve as a source of cash, it
also generally makes customary representations and warranties regarding the characteristics of the
loans sold. To the extent the loans do not meet specified characteristics investors are generally
entitled to cause the Company to repurchase such loans.
In addition to its servicing and warranty obligations, in the past the Company loan sale activities
have included the sale of non-conforming mortgage loans subject to recourse arrangements that
generally require the Company to repurchase or substitute the loans if the loans are 90 days or
more past due or otherwise in default up to a specified amount or limited to a period of time after
the sale. To the extent the delinquency ratios of the loans sold subject to recourse are greater
than anticipated and the Company is required to repurchase more loans than anticipated, the
Companys liquidity requirements would increase. Please refer to Off-Balance Sheet Activities
below for additional information on these arrangements.
In the past, the Company sold or securitized mortgage loans with FNMA on a partial or full recourse
basis. The Companys contractual agreements with FNMA authorize FNMA to require the Company to post
collateral in the form of cash or marketable securities to secure such recourse obligation to the
extent the Company does not maintain an investment grade rating. As of June 30, 2011, the Companys
maximum recourse exposure with FNMA totaled $545.4 million and required the posting of a minimum of
$44.0 million in collateral to secure recourse obligations. While considered unlikely by the
Company, FNMA has the contractual right to request collateral for the full amount of the Companys
recourse obligations. Any such request by FNMA would have a material adverse effect on the
Companys liquidity and business. Please refer to Note 25 of the accompanying consolidated
financial statements and Off-Balance Sheet Activities below for additional information on these
arrangements.
Under the Companys repurchase lines of credit and derivative contracts, the Company is required to
deposit cash or qualifying securities to meet margin requirements. To the extent that the value of
securities previously pledged as collateral declines because of changes in interest rates or other
market conditions, the Company will be required to deposit additional cash or securities to meet
its margin requirements, thereby adversely affecting its liquidity.
ASSETS AND LIABILITIES
Doral Financials total assets were $8.0 billion at June 30, 2011, compared to $8.6 billion at
December 31, 2010.
Total assets at June 30, 2011, when compared to December 31, 2010 were affected by a decrease of
$833.6 million in available for sale securities as part of the Companys deleverage and interest
rate risk strategies, which was partially offset by an increase of $206.6 million in cash and due
from banks and an increase of $130.2 million in net loan receivable.
Total liabilities were $7.2 billion at June 30, 2011, compared to $7.8 billion at December 31,
2010. Total liabilities as of June 30, 2011 were principally affected by (i) a decrease in brokered
deposits of $328.2 million, (ii) a decrease in securities sold under agreements to repurchase of
$734.5 million, offset by (iii) an increase in advances from FHLB of $441.4 million and (iv) an
increase of $12.5 million in non-brokered deposits.
CAPITAL
Doral Financial reported total equity of $864.3 million at June 30, 2011, compared to $862.2
million at December 31, 2010. The Company reported accumulated other comprehensive income (net of
tax) (OCI) of $1.6 million as of June 30, 2011, compared to OCI of $4.2 million as of December
31, 2010.
Regulatory Capital Ratios
As of June 30, 2011, Doral Bank PR and Doral Bank US were in compliance with all the applicable
regulatory capital requirements as a state non-member bank and federal savings bank, respectively
(i.e., Total capital and Tier 1 capital to risk-weighted assets of at least 8% and 4%,
respectively, and Tier 1 capital to average assets of at least 4%). However, as described below,
Doral Financial is subject to a consent order pursuant to which it submitted a capital plan in
which it has agreed to maintain capital ratios in excess of the prompt corrective action well
capitalized floors at both the holding company and Doral Bank PR level.
Set forth below are Doral Financials, and its banking subsidiaries regulatory capital ratios as
of June 30, 2011, based on existing Federal Reserve, FDIC and OTS guidelines.
90
Table N
Regulatory Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
Doral |
|
Doral |
|
Doral |
|
|
Financial |
|
Bank PR |
|
Bank US |
Total Capital Ratio (Total capital
to risk-weighted assets) |
|
|
14.7 |
% |
|
|
15.4 |
% |
|
|
12.4 |
% |
Tier 1 Capital Ratio (Tier 1
capital to risk-weighted assets)
|
|
|
13.4 |
% |
|
|
14.2 |
% |
|
|
12.1 |
% |
Tier 1 Leverage Ratio (1) |
|
|
9.1 |
% |
|
|
8.6 |
% |
|
|
6.9 |
% |
|
|
|
(1) |
|
Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR
and Tier 1 capital to adjusted total assets in the case of Doral Bank US. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
Doral |
|
Doral |
|
Doral |
|
|
Financial |
|
Bank PR |
|
Bank US |
Total Capital Ratio (Total capital to risk-weighted assets) |
|
|
14.5 |
% |
|
|
15.6 |
% |
|
|
11.0 |
% |
Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets) |
|
|
13.3 |
% |
|
|
14.4 |
% |
|
|
10.7 |
% |
Leverage Ratio (1) |
|
|
8.6 |
% |
|
|
8.0 |
% |
|
|
6.5 |
% |
|
|
|
(1) |
|
Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR
and Tier 1 capital to adjusted total assets in the case of Doral Bank US. |
As of June 30, 2011, Doral Financial capital levels exceeded the well capitalized thresholds
under applicable federal bank regulatory definitions. The well capitalized thresholds as contained
in the prompt corrective action regulations adopted by the FDIC pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) require an institution to maintain a
Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of
at least 10% and not be subject to any written agreement or directive to meet a higher specific
capital ratio.
Failure to meet minimum regulatory capital requirements could result in the initiation of certain
mandatory and additional discretionary actions by banking regulators against Doral Financial and
its banking subsidiaries that, if undertaken, could have a material adverse effect on Doral
Financial, such variety of enforcement remedies, including, with respect to an insured bank or
savings bank, the termination of deposit insurance by the FDIC, and to certain restrictions on its
business.
On March 17, 2006, Doral Financial entered into a consent order with the Federal Reserve, pursuant
to which the Company submitted a capital plan in which it established a target minimum leverage
ratio of 5.5% for Doral Financial and 6.0% for Doral Bank PR. For a detailed description of this
order, please refer to Part I, Item 3. Legal Proceedings, in the Companys 2010 Annual Report on
Form 10-K.
During the second and third quarters of 2010, the Board of Directors of Doral Financial approved
capital contributions to Doral Bank PR totaling $194.0 million.
Housing and Urban Development Requirements
The Companys mortgage operation is a U.S. Department of Housing and Urban Development (HUD)
approved non-supervised mortgagee and is required to maintain an excess of current assets over
current liabilities and minimum net worth, as defined by the various regulatory agencies. Such
equity requirement is tied to the size of the Companys servicing portfolio and ranged up to $1.0
million. The Company is also required to maintain fidelity bonds and errors and omissions insurance
coverage based on the balance of its servicing portfolio. Non-compliance with these requirements
could derive in actions from the regulatory agencies such as monetary penalties, the suspension of
the license to originate loans, among others.
As of June 30, 2011 and December 31, 2010, Doral Mortgage maintained $27.7 million and $27.2
million, respectively, in excess of the required minimum level for adjusted net worth required by
HUD.
91
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses fair value measurements to state certain assets and liabilities at fair value and
to support fair value disclosures. Securities held for trading, securities available for sale,
derivatives and servicing assets are recorded at fair value on a recurring basis. Additionally,
from time to time, the Company may be required to record other financial assets at fair value on a
nonrecurring basis, such as loans held for sale, loans receivable and certain other assets. These
nonrecurring fair value adjustments typically involve application of lower of cost or market
accounting or write-downs of individual assets.
The Company groups its assets and liabilities at fair value in three levels, based on the markets
in which the assets and liabilities are traded and the reliability of the assumptions used to
determine fair value. These levels are:
Level 1 Valuation is based upon unadjusted quoted prices for identical
instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques for which all significant assumptions
are observable in the market, or are derived principally from or corroborated by
observable market data, by correlation or by other means.
Level 3 Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable assumptions
reflect the Companys estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
The Company bases fair values on the price that would be received upon sale of an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement
date. It is Doral Financials intent to maximize the use of observable inputs and minimize the use
of unobservable inputs when developing fair value measurements, in accordance with the fair value
hierarchy in the current accounting guidance.
Fair value measurements for assets and liabilities where there is limited or no observable market
data are based primarily upon the Companys estimates, and are generally calculated based on
current pricing policy, the economic and competitive environment, the characteristics of the asset
or liability and other such factors. Therefore, the fair values represent managements estimates
and may not be realized in an actual sale or immediate settlement of the asset or liability.
Additionally, there may be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future cash flows, could
significantly affect the results of current or future values.
Approximately 10.38% and 19.3% of the Company total assets at June 30, 2011 and December 31, 2010,
respectively, consisted of financial instruments recorded at fair value on a recurring basis.
Assets for which fair values were measured using significant Level 3 inputs represented
approximately 22.7% and 11.0% of these financial instruments at June 30, 2011 and December 31,
2010, respectively. The fair values of the remaining assets were measured using valuation
methodologies involving market-based or market-derived information, collectively Level 1 and 2
measurements.
Refer to Note 29 of the accompanying consolidated financial statements for a discussion about the
extent to which fair value is used to measure assets and liabilities, the valuation methodologies
used and its impact on earnings.
OFF-BALANCE SHEET ACTIVITIES
In the ordinary course of the business, Doral Financial makes certain representations and
warranties to purchasers and insurers of mortgage loans at the time of the loan sales to third
parties regarding the characteristics of the loans sold, and in certain circumstances, such as in
the event of early or first payment default. To the extent the loans do not meet specified
characteristics, if there is a breach of contract of a representation or warranty or if there is an
early payment default, Doral Financial may be required to repurchase the mortgage loan and bear any
subsequent loss related to the loan. For the six month periods ended June 30, 2011 and 2010,
repurchases amounted to approximately $4.2 million and $50,000, respectively. These repurchases
were recorded at fair value and no significant losses were incurred.
In the past, in relation to its asset securitization and loan sale activity, the Company sold pools
of delinquent FHA, VA and conventional mortgage loans on a servicing retained basis. Following
these transactions, the loans were not reflected on Doral Financials consolidated statements of
financial condition. Under these arrangements, as part of its servicing responsibilities, Doral
Financial is required to advance the scheduled payments of principal and interest regardless of
whether they are collected from the underlying borrower. While Doral Financial expects to recover a
significant portion of the amounts advanced through foreclosure or, in the case of FHA and VA
loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend
to be greater than normal arrangements because of delinquent status of the loans. As of June 30,
2011 and December 31, 2010, the outstanding principal balance of such delinquent loans amounted to
$125.1 million and $139.6 million, respectively.
92
In addition, Doral Financials loan sale activities in the past included certain mortgage loan sale
and securitization transactions subject to recourse arrangements that require Doral Financial to
repurchase or substitute the loan if the loans are 90-120 days or more past due or otherwise in
default. The Company is also required to pay interest on delinquent loans in the form of servicing
advances. Under certain of these arrangements, the recourse obligation is terminated upon
compliance with certain conditions, which generally involve: (i) the lapse of time (normally from
four to seven years), (ii) the lapse of time combined with certain other conditions such as the
unpaid principal balance of the mortgage loans falling below a specific percentage (normally less
than 80%) of the appraised value of the underlying property or (iii) the amount of loans
repurchased pursuant to recourse provisions reaching a specific percentage of the original
principal amount of loans sold (generally from 10% to 15%). As of June 30, 2011 and December 31,
2010, the Companys records reflected that the outstanding principal balance of loans sold subject
to full or partial recourse was $0.7 billion and $0.8 billion, respectively. As of such dates, the
Companys records also reflected that the maximum contractual exposure to Doral Financial if it
were required to repurchase all loans subject to recourse was $0.7 billion. Doral Financials
contingent obligation with respect to such recourse provision is not reflected on Doral Financials
consolidated financial statements, except for a liability of estimated losses from such recourse
agreements, which is included as part of Accrued expenses and other liabilities. The Company
discontinued the practice of selling loans with recourse obligations in 2005. Doral Financials
current strategy is to sell loans on a non-recourse basis, except recourse for certain early
payment defaults. For the quarter and six month periods ended June 30, 2011, the Company
repurchased at fair value $1.4 million and $5.8 million, respectively, pursuant to recourse
provisions, compared to $6.7 million and $14.0 million, respectively, for the corresponding periods
of 2010.
Doral Financial reserves for its exposure to recourse amounted to $10.1 million and $10.3 million
as of June 30, 2011 and December 31, 2010, respectively, and the reserve for other credit-enhanced
transactions explained above amounted $8.8 million and $9.0 million as of June 30, 2011 and
December 31, 2010, respectively. For additional information regarding sales of delinquent loans
please refer to Liquidity and Capital Resources above.
93
The following table shows the changes in the Companys liability of estimated losses from recourse
agreements, included in the Statement of Financial Condition, for each of the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Month Period Ended |
|
(In thousands) |
|
June 30, 2011 |
|
|
June 30, 2011 |
|
Balance at beginning of period |
|
$ |
9,877 |
|
|
$ |
10,264 |
|
Net charge-offs / termination |
|
|
(100 |
) |
|
|
(728 |
) |
Provision for recourse liability |
|
|
352 |
|
|
|
593 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
10,129 |
|
|
$ |
10,129 |
|
|
|
|
|
|
|
|
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The tables below summarize Doral Financials contractual obligations, on the basis of contractual
maturity or first call date, whichever is earlier, and other commercial commitments as of June 30,
2011.
Table Q
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
After |
|
(In thousands) |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Deposits |
|
$ |
4,302,792 |
|
|
$ |
2,941,531 |
|
|
$ |
833,959 |
|
|
$ |
453,277 |
|
|
$ |
74,025 |
|
Repurchase agreements(1)(2) |
|
|
442,300 |
|
|
|
100,000 |
|
|
|
307,300 |
|
|
|
35,000 |
|
|
|
|
|
Advances from FHLB(1)(2) |
|
|
1,342,849 |
|
|
|
214,000 |
|
|
|
628,027 |
|
|
|
500,822 |
|
|
|
|
|
Loans payable (3) |
|
|
294,623 |
|
|
|
28,517 |
|
|
|
55,870 |
|
|
|
48,170 |
|
|
|
162,066 |
|
Notes payable |
|
|
510,430 |
|
|
|
37,797 |
|
|
|
13,789 |
|
|
|
102,110 |
|
|
|
356,734 |
|
Other liabilities |
|
|
107,642 |
|
|
|
107,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases |
|
|
50,916 |
|
|
|
6,225 |
|
|
|
11,599 |
|
|
|
10,232 |
|
|
|
22,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
|
$ |
7,051,552 |
|
|
$ |
3,435,712 |
|
|
$ |
1,850,544 |
|
|
$ |
1,149,611 |
|
|
$ |
615,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts included in the table above do not include interest. |
|
(2) |
|
Includes $100.0 million of a repurchase agreement with a fixed rate of 2.98% and
which the lender has the right to call before its contractual maturity. The repurchase
agreement is included in the less-than-one year category in the above table but has an actual
contractual maturity of February 2014. It was included on the first call date basis because
increases in interest rates over the average rate of the Companys borrowings may induce the
lender to exercise its right. |
|
(3) |
|
Consist of secured borrowings with local financial institutions, collateralized by
residential mortgage loans at variable interest rates tied to 3-month LIBOR. These loans are
not subject to scheduled payments, but are required to be repaid according to the regular
amortization and prepayments of the underlying mortgage loans. For purposes of the table
above, the Company used a CPR of 7.5% to estimate the repayments. |
The Company enters into financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments may include
commitments to extend credit and sell loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the statement of
financial position.
The contractual amounts of these instruments reflect the extent of involvement the Company has in
particular classes of financial instruments. The Companys exposure to credit losses in the event
of non-performance by the other party to the financial instrument for commitments to extend credit
or for forward sales is represented by the contractual amount of these instruments. Doral Financial
uses the same credit policies in making these commitments as it does for on-balance sheet
instruments.
94
Commitments to extend credit are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration dates or other
termination clauses. Generally, the Company does not enter into interest rate lock agreements with
borrowers.
The Company purchases mortgage loans and simultaneously enters into a sale and securitization
agreement with the same counterparty, essentially a forward contract that meets the definition of a
derivative during the period between trade and settlement date.
A letter of credit is an arrangement that represents an obligation on the part of the Company to a
designated third party, contingent upon the failure of the Companys customer to perform under the
terms of the underlying contract with a third party. The amount of the letter of credit represents
the maximum amount of credit risk in the event of non-performance by these customers. Under the
terms of a letter of credit, an obligation arises only when the underlying event fails to occur as
intended, and the obligation is
generally up to a stipulated amount and with specified terms and conditions. Letters of credit are
used by the customer as a credit enhancement and typically expire without having been drawn upon.
The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of
collateral, if considered necessary by the Company upon extension of credit, is based on
managements credit evaluation of the counterparty.
Table P
Other Commercial Commitments (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
After |
|
(In thousands) |
|
Committed |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Commitments to extend credit |
|
$ |
146,982 |
|
|
$ |
86,140 |
|
|
$ |
25,065 |
|
|
$ |
|
|
|
$ |
35,777 |
|
Commitments to sell loans |
|
|
98,123 |
|
|
|
98,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial standby letters of credit |
|
|
2,664 |
|
|
|
2,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum contractual recourse exposure |
|
|
653,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
653,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
901,724 |
|
|
$ |
186,927 |
|
|
$ |
25,065 |
|
|
$ |
|
|
|
$ |
689,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Off-Balance Sheet Activities above for additional information
regarding other commercial commitments of the Company. |
RISK MANAGEMENT
Doral Financials business is subject to four broad categories of risks: interest rate risk, credit
risk, operational risk and liquidity risk. Doral Financial has specific policies and procedures
which have been designed to identify, measure and manage risks to which the Company is exposed.
Interest Rate and Market Risk Management
Interest rate risk refers to the risk that changes in interest rates may adversely affect the value
of Doral Financials assets and liabilities and its net interest income.
Doral Financials risk management policies are designed with the goal of maximizing shareholder
value with emphasis on stability of net interest income and market value of equity. These policies
are also targeted to remain well capitalized, preserve adequate liquidity, and meet various
regulatory requirements. The objectives of Doral Financials risk management policies are pursued
within the limits established by the Board of Directors of the Company. The Board of Directors has
delegated the oversight of interest rate and liquidity risks to its Risk Policy Committee.
Doral Financials Asset/Liability Management Committee (ALCO) has been created under the
authority of the Board of Directors to manage the Companys interest rate, market value of equity
and liquidity risk. The ALCO is primarily responsible for ensuring that Doral Financial operates
within the Companys established asset/liability management policy guidelines and procedures. The
ALCO reports directly to the Risk Policy Committee of the Board of Directors.
95
The ALCO is responsible for:
|
|
|
developing the Companys asset/liability management and liquidity strategy; |
|
|
|
|
establishing and monitoring of interest rate, pricing and liquidity risk limits to
ensure compliance with the Companys policies; |
|
|
|
|
overseeing product pricing and volume objectives for banking and treasury activities;
and |
|
|
|
|
overseeing the maintenance of management information systems that supply relevant
information for the ALCO to fulfill its responsibilities as it relates to asset/liability
management. |
Risk Identification Measurement and Control
Doral Financial manages interest rate exposure related to its assets and liabilities on a
consolidated basis. Changes in interest rates can affect the volume of Doral Financials mortgage
loan originations, the net interest income earned on Doral Financials portfolio of loans and
securities, the amount of gain on the sale of loans and the value of Doral Financials servicing
assets, loans, investment securities and other retained interests.
As part of its interest rate risk management practices, Doral Financial has implemented measures to
identify the interest rate risk associated with the Companys assets, liabilities and off-balance
sheet activities. The Company has also developed policies and procedures to control and manage
these risks and continues to improve its interest rate risk management practices. The Company
currently manages its interest rate risk by principally focusing on the following metrics: (i) net
interest income sensitivity; (ii) market value of equity sensitivity; (iii) effective duration of
equity; and (iv) maturity/repricing gaps. Doral Financials Asset/Liability Management Policies
provide a limit structure based on these four metrics. A single limit is defined for effective
duration of equity. Net interest income sensitivity limits are set for instantaneous parallel rate
shifts. Specific parallel rate shifts defined for net interest income and market value equity
limits are -300 bps, -200 bps, -100 bps, +100 bps, +200 bps, and +300 bps. Net interest income
sensitivity limits are established for different time horizons. Additional limits are defined for
maturity/repricing mismatches, however management continues to emphasize risk management and
controls based on net interest income and market value of equity sensitivity as these measures
incorporate the effect of existing asset/liability mismatches. The explanations below provide a
brief description of the metrics used by the Company and the methodologies/assumptions employed in
the estimation of these metrics:
|
|
|
Net Interest Income Sensitivity. Refers to the relationship between market interest
rates and net interest income due to the maturity mismatches and repricing characteristics
of Doral Financials interest-earning assets, interest-bearing liabilities and off-balance
sheet positions. To measure net interest income exposure to changes in market interest
rates, the Company uses earnings simulation techniques. These simulation techniques allow
for the forecasting of net interest income and expense under various rate scenarios for the
measurement of interest rate risk exposures of Doral Financial. Primary scenarios include
instantaneous parallel and non-parallel rate shocks. Net interest income sensitivity is
measured for time horizons ranging from twelve to sixty months and as such, serves as a
measure of short to medium term earnings risk. The basic underlying assumptions used in net
interest income simulations are: (i) the Company maintains a static balance sheet; (ii)
full reinvestment of funds in similar product/instruments with similar maturity and
repricing characteristics; (iii) spread assumed constant; (iv) prepayment rates on
mortgages and mortgage related securities are modeled using multi-factor prepayment model;
(v) non-maturity deposit decay and price elasticity assumptions are incorporated, and (vi)
evaluation of embedded options is also taken into consideration. To complement and broaden
the analysis of earnings at risk the Company also performs earning simulations for longer
time horizons. |
|
|
|
|
Market Value of Equity Sensitivity. Used to capture and measure the risks associated
with longer-term maturity and re-pricing mismatches. Doral Financial uses value simulation
techniques for all financial components of the consolidated statement of financial
condition. Valuation techniques include static cash flows analyses, stochastic models to
qualify value of embedded options and prepayment modeling. To complement and broaden the
risk analysis, the Company uses duration and convexity analysis to measure the sensitivity
of the market value of equity to changes in interest rates. Duration measures the linear
change in market value of equity caused by changes in interest rates, while, convexity
measures the asymmetric changes in market value of equity caused by changes in interest
rates due to the presence of options. The analysis of duration and convexity combined
provide a better understanding of the sensitivity of the market value of equity to changes
in interest rates. |
|
|
|
|
Effective Duration of Equity. The effective duration of equity is a broad measure of
the impact of interest rate changes on Doral Financials economic capital. The measure
summarizes the net sensitivity of assets and liabilities, adjusted for off-balance sheet
positions. |
96
Interest Rate Risk Management Strategy
Doral Financials current interest rate management strategy is implemented by the ALCO and is
focused on reducing the volatility of the Companys earnings and to protect the market value of
equity. While the current strategy will also use a combination of derivatives and balance sheet
management, more emphasis is placed on balance sheet management.
Net Interest Income Risk. In order to protect net interest income against interest rate risk, the
ALCO employs a number of tactics which are evaluated and adjusted in relation to prevailing market
conditions. Internal balance sheet management practices are designed to reduce the re-pricing gaps
of the Companys assets and liabilities. However, the Company will use derivatives, mainly interest
rate swaps and interest rate caps, as part of its interest rate risk management activities.
Interest rate swaps represent a mutual agreement to exchange interest rate payments; one party pays
fixed rate and the other pays a floating rate. For
net interest income protection, Doral Financial typically enters into a fixed rate payer-float
receiver swaps to eliminate the variability of cash flows associated with the floating rate debt
obligations.
Market Value of Equity Hedging Strategies. Due to the composition of Doral Financials assets and
liabilities, the Company has earnings exposure to rising interest rates. The Company measures the
market value of all rate sensitive assets, liabilities and off-balance sheet positions; and the
difference between assets and liabilities, adjusted by off-balance sheet positions, is termed
market value of equity. The Company measures how the market value of equity fluctuates with
different rate scenarios to measure risk exposure of economic capital or market value equity.
Management uses duration matching strategies to manage the fluctuations of market value of equity
within the long-term targets established by the Board of Directors of the Company.
Duration Risk. Duration is a measure of the impact (in magnitude and direction) of changes on
interest rates in the economic value of financial instruments. In order to bring duration measures
within the policy thresholds established by the Company, management may use a combination of
internal liability management techniques and derivative instruments. Derivatives such as interest
rate swaps, treasury futures, Eurodollar futures and forward contracts may be entered into as part
of the Companys risk management.
Convexity Risk. Convexity is a measure of how much duration changes as interest rates change. For
Doral Financial, convexity risk primarily results from mortgage prepayment risk. As part of
managing convexity risk management may use a combination of internal balance sheet management
instruments or derivatives, such as swaptions, caps, floors, put or call options on interest rate
indexes or related fixed income underlying securities (i.e. Eurodollar, treasury notes).
Hedging related to Mortgage Banking Activities. As part of Doral Financials risk management of
mortgage banking activities, such as secondary market and servicing assets, the Company enters into
forward agreements to buy or sell MBS to protect the Company against changes in interest rates that
may impact the economic value of servicing assets or the pricing of marketable loan production.
Hedging the various sources of interest rate risks related to mortgage banking activities is a
complex process that requires sophisticated modeling, continuous monitoring and active management.
While Doral Financial balances and manages the various aspects relating to mortgage activities,
there are potential risks to earnings associated to them. Some of these potential risks are:
|
|
|
The valuation of MSRs are recorded in earnings immediately within the accounting period
in which the changes in value occur, whereas the impact of changes in interest rates are
reflected in originations with a time lag and effects on servicing fee income occurs over
time. Thus, even when mortgage activities could be protected from adverse changes in
interest rates over a period of time (on a cumulative basis) they may display large
variations in income from period to period. |
|
|
|
|
The degree to which the natural hedge associated to mortgage banking (i.e.
originating and servicing) offsets changes in servicing asset valuations may be imperfect,
as it may vary over time. |
|
|
|
|
Origination volumes, the valuation of servicing assets, economic hedging activities and
other related costs are impacted by multiple factors, which include, changes in the mix of
new business, changes in the term structure of interest rates, changes in mortgage spreads
(mortgage basis) to other rate benchmarks, and rate volatility, among others. Interrelation
of all these factors is hard to predict and, as such, the ability to perfectly hedge their
effects is limited. |
Doral Financials Risk Profile
Doral Financials goal is to manage market and interest rate risk within targeted levels
established and periodically reviewed by the Board of Directors of the Company. Interest rate
sensitivity represents the relationship between market interet rates and the
97
net interest income
due to existing maturity and repricing imbalances between interest-earning assets and
interest-bearing liabilities. Interest rate sensitivity is also defined as the relationship between
market interest rates and the economic value of equity (referred to market value of equity or
MVE). The interest risk profile of the Company is measured in the context of net interest income,
market value of equity, maturity/repricing gaps and effective duration of equity.
The risk profile of the Company is managed by use of natural offsets generated by the different
components of the balance sheet as a result of the normal course of business operations and through
active hedging activities by means of both on-balance sheet and off-balance sheet transactions
(i.e. derivative instruments) to achieve targeted risk levels.
The Companys interest rate risk exposure may be asymmetric due to the presence of embedded options
in products and transactions which allow clients and counterparties to modify the maturity of
loans, securities, deposits and/or borrowings. Examples of embedded options include the ability of
a mortgagee to prepay his/her mortgage or a counterparty exercising its puttable option on a
structured funding transaction. Assets and liabilities with embedded options are evaluated taking
into consideration the presence of options to estimate their economic price elasticity and also the
effect of options in assessing maturity/repricing characteristics of the Companys balance sheet.
The embedded optionality is primarily managed by purchasing or selling options or by other active
risk management strategies involving the use of derivatives, including the forward sale of MBS.
The Company measures interest rate risk and has specific targets for various market rate scenarios.
General assumptions for the measurement of interest income sensitivity are: (i) rate shifts are
parallel and instantaneous throughout all benchmark yield curves and rate indexes; (ii) behavioral
assumptions are driven by simulated market rates under each scenario (i.e. prepayments, repricing
of certain liabilities); (iii) static balance sheet assumed with cash flows reinvested at
forecasted market rates (i.e. forward curve, static spreads) in similar instruments. For net
interest income the Company monitors exposures and has established limits for time horizons ranging
from one up to three years, although for risk management purposes earning exposures are forecasted
for longer time horizons.
The tables below present the risk profile of Doral Financial (taking into account the derivatives
set forth below) under 100-basis point parallel and instantaneous increases or decreases of
interest rates, as of June 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
Market Value of Equity Risk |
|
Net Interest Income Risk (1) |
+ 100 BPS |
|
|
(6.3 |
)% |
|
|
1.0 |
% |
- 100 BPS |
|
|
3.6 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
Market Value of Equity Risk |
|
Net Interest Income Risk (1) |
+ 100 BPS |
|
|
(8.5 |
)% |
|
|
(0.9) |
% |
- 100 BPS |
|
|
4.7 |
% |
|
|
(0.1) |
% |
|
|
|
(1) |
|
Based on 12-month forward change in net interest income. |
The net interest income (NII) sensitivity measure to a one hundred (100) basis point
parallel and instantaneous rate increase, based on a 12-month horizon, changed from (0.9)% to 1.0%
when comparing December 31, 2010 to June 30, 2011. The effect is driven by the continued efforts to
reduce maturity/repricing mismatches by extending the maturity in certain wholesale liabilities,
sale of investments and the growth of variable rate syndicated loans.
As of June 30, 2011 the market value of equity (MVE) showed lower sensitivity to rising interest
rates when compared to December 31, 2010. MVE sensitivity to an increase of one hundred (100) basis
points in market rates changed from (8.5)% to (6.3)%. The Company has been actively managing the
balance sheet to maintain the interest rate risk measures in line with targets mainly by the use of
on-balance sheet strategies. The sale of certain investment securities, the continued focus on
extending maturity of wholesale funding, issuance of callable funding and growth in variable rate
assets, have all contributed to reducing MVE exposure.
98
The following table shows the Companys investment portfolio sensitivity to changes in interest
rates. The table below assumes parallel and instantaneous increases and decreases of interest rates
as of June 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
December 31, 2010 |
|
|
Change in Fair |
|
Change in Fair |
Change in Interest |
|
Value of Available |
|
Value of Available |
Rates (Basis Points) |
|
For Sale Securities |
|
For Sale Securities |
+200 |
|
$ |
(45,387 |
) |
|
$ |
(180,474 |
) |
+100 |
|
|
(19,571 |
) |
|
|
(47,474 |
) |
Base |
|
|
|
|
|
|
|
|
-100 |
|
|
6,997 |
|
|
|
21,917 |
|
-200 |
|
|
11,370 |
|
|
|
34,416 |
|
Derivatives. As described above, Doral Financial uses derivatives to manage its exposure to
interest rate risk caused by changes in interest rates. Derivatives are generally either privately
negotiated over-the-counter (OTC) contracts or standard contracts
transacted through regulated exchanges. OTC contracts generally consist of swaps, caps and collars,
forwards and options. Exchange-traded derivatives include futures and options.
The Company is subject to various interest rate cap agreements to manage its interest rate
exposure. Interest rate cap agreements generally involve purchase of out of the money caps to
protect the Company from larger rate moves and to provide the Company with positive convexity.
Non-performance by the counterparty exposes Doral Financial to interest rate risk. The following
table summarizes the Companys interest rate caps outstanding at June 30, 2011.
Table R
Interest Rate Caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
Fair |
|
Amount |
|
|
|
|
Date |
|
Entitled Payment Conditions |
|
Premium Paid |
|
|
Value |
|
$ |
15,000 |
|
|
|
|
September, 2011 |
|
1-month LIBOR over 5.50% |
|
$ |
134 |
|
|
$ |
|
|
|
15,000 |
|
|
|
|
September, 2012 |
|
1-month LIBOR over 6.00% |
|
|
143 |
|
|
|
|
|
|
15,000 |
|
|
|
|
October, 2011 |
|
1-month LIBOR over 5.00% |
|
|
172 |
|
|
|
|
|
|
15,000 |
|
|
|
|
October, 2012 |
|
1-month LIBOR over 5.50% |
|
|
182 |
|
|
|
|
|
|
50,000 |
|
|
|
|
November, 2012 |
|
1-month LIBOR over 6.50% |
|
|
228 |
|
|
|
|
|
|
50,000 |
|
|
|
|
November, 2012 |
|
1-month LIBOR over 5.50% |
|
|
545 |
|
|
|
1 |
|
|
50,000 |
|
|
|
|
November, 2012 |
|
1-month LIBOR over 6.00% |
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
210,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,754 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to various interest rate swap agreements to manage its interest rate
exposure. Interest rate swap agreements generally involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal. The Company
principally uses interest rate swaps to convert floating rate liabilities to fixed rate by entering
into pay fixed receive floating interest rate swaps. Non-performance by the counterparty exposes
Doral Financial to interest rate risk. The following table summarizes the Companys interest rate
swaps outstanding at June 30, 2011.
99
Table S
Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
Fair |
|
Amount |
|
|
|
|
Date |
|
|
Pay Fixed Rate |
|
|
Receive Floating Rate |
|
|
Value |
|
Cash Flow Hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,000 |
|
|
|
|
September, 2011 |
|
|
4.69 |
% |
|
1-month LIBOR plus 0.02% |
|
$ |
(34 |
) |
|
6,000 |
|
|
|
|
October, 2011 |
|
|
4.51 |
% |
|
1-month LIBOR plus 0.05% |
|
|
(86 |
) |
|
5,000 |
|
|
|
|
October, 2012 |
|
|
4.62 |
% |
|
1-month LIBOR plus 0.05% |
|
|
(282 |
) |
|
15,000 |
|
|
|
|
November, 2011 |
|
|
4.55 |
% |
|
1-month LIBOR plus 0.02% |
|
|
(275 |
) |
|
45,000 |
|
|
|
|
November, 2012 |
|
|
4.62 |
% |
|
1-month LIBOR plus 0.02% |
|
|
(2,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Derivatives. Doral Financial uses derivatives to manage its market risk and
generally accounts for such instruments on a mark-to-market basis with gains or losses charged to
current operations as part of net gain (loss) on trading activities as they occur. Contracts with
positive fair values are recorded as assets and contracts with negative fair values as liabilities,
after the application of netting arrangements. Fair values of derivatives such as interest rate
futures contracts or options are determined by reference to market prices. Fair values for
derivatives purchased in the over-the-counter market are determined by valuation models and
validated with prices provided by external sources. The notional amounts of freestanding
derivatives totaled $265.0 million and $310.0 million as of June 30, 2011 and December 31, 2010,
respectively. Notional amounts indicate the volume of derivative activity, but do not represent
Doral Financials exposure to market or credit risk.
Derivatives Hedge Accounting. Doral Financial seeks to designate derivatives under hedge
accounting guidelines when it can clearly identify an asset or liability that can be hedged
pursuant to the strict hedge accounting guidelines. The notional amount of swaps treated under
hedge accounting totaled $74.0 million at both June 30, 2011 and December 31, 2010, respectively.
The Company typically uses interest rate swaps to convert floating rate advances from FHLB to fixed
rate by entering into pay fixed receive floating swaps. In these cases, the Company matches all of
the terms in the advance from FHLB to the floating leg of the interest rate swap. Since both
transactions are symmetrically opposite the effectiveness of the hedging relationship is high.
The following table summarizes the total derivatives positions at June 30, 2011 and December 31,
2010, respectively, and their different designations.
Table T
Derivatives Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Notional |
|
|
Fair |
|
|
Notional |
|
|
Fair |
|
(In thousands) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
74,000 |
|
|
$ |
(3,382 |
) |
|
$ |
74,000 |
|
|
$ |
(4,677 |
) |
Other Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
|
210,000 |
|
|
|
1 |
|
|
|
210,000 |
|
|
|
13 |
|
Forward contracts |
|
|
55,000 |
|
|
|
(45 |
) |
|
|
100,000 |
|
|
|
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,000 |
|
|
|
(44 |
) |
|
|
310,000 |
|
|
|
(728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
339,000 |
|
|
$ |
(3,426 |
) |
|
$ |
384,000 |
|
|
$ |
(5,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
100
The following tables summarize the fair values of Doral Financials freestanding derivatives as
well as the source of the fair values.
Table U
Fair Value Reconciliation
|
|
|
|
|
|
|
Six Month Period Ended |
|
(In thousands) |
|
June 30, 2011 |
|
Fair value of contracts outstanding at the beginning of the period |
|
$ |
(728 |
) |
Changes in fair values during the period |
|
|
684 |
|
|
|
|
|
Fair value of contracts outstanding at the end of the period |
|
$ |
(44 |
) |
|
|
|
|
Table V
Sources of Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Payment Due by Period |
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
|
|
less than |
|
|
Maturity |
|
|
Maturity |
|
|
in excess |
|
|
Total Fair |
|
As of June 30, 2011 |
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
of 5 Years |
|
|
Value |
|
Prices actively quoted |
|
$ |
(45 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(45 |
) |
Prices provided by internal sources |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(45 |
) |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The use of derivatives involves market and credit risk. The market risk of derivatives arises
principally from the potential for changes in the value of derivative contracts based on changes in
interest rates.
The credit risk of OTC derivatives arises from the potential of counterparties to default on their
contractual obligations. To manage this credit risk, Doral Financial deals with counterparties of
good credit standing, enters into master netting agreements whenever possible and monitors the
markets on pledged collateral to minimize credit exposure. Master netting agreements
incorporate rights of set-off that provide for the net settlement of contracts with the same
counterparty in the event of default. As a result of the ratings downgrades affecting Doral
Financial, counterparties to derivative contracts used for interest rate risk management purposes
could increase the applicable margin requirements under such contracts, or could require the
Company to terminate such agreements.
101
Table W
Derivative Counterparty Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
|
|
|
|
Total Exposure at |
|
|
Negative Fair |
|
|
|
|
|
|
Contractual Maturity |
|
Rating (1) |
|
Counterparties(2) |
|
|
Notional |
|
|
Fair Value (3) |
|
|
Values |
|
|
Total Fair Value |
|
|
(in years) |
|
AA- |
|
|
1 |
|
|
$ |
180,000 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
|
1.27 |
|
A+ |
|
|
1 |
|
|
|
104,000 |
|
|
|
|
|
|
|
(3,382 |
) |
|
|
(3,382 |
) |
|
|
0.98 |
|
A |
|
|
2 |
|
|
|
55,000 |
|
|
|
168 |
|
|
|
(213 |
) |
|
|
(45 |
) |
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
4 |
|
|
$ |
339,000 |
|
|
$ |
169 |
|
|
$ |
(3,595 |
) |
|
$ |
(3,426 |
) |
|
|
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the S&P Long-Term Issuer Credit Ratings. |
|
(2) |
|
Based on legal entities. Affiliated legal entities are reported separately. |
|
(3) |
|
For each counterparty, this amount includes derivatives with a positive fair value
including the related accrued interest receivable/payable (net.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
|
|
|
|
Total Exposure at |
|
|
Negative Fair |
|
|
|
|
|
|
Contractual Maturity |
|
Rating (1) |
|
Counterparties(2) |
|
|
Notional |
|
|
Fair Value (3) |
|
|
Values |
|
|
Total Fair Value |
|
|
(in years) |
|
AA- |
|
|
1 |
|
|
$ |
180,000 |
|
|
$ |
12 |
|
|
$ |
|
|
|
$ |
12 |
|
|
|
1.76 |
|
A+ |
|
|
1 |
|
|
|
104,000 |
|
|
|
1 |
|
|
|
(4,677 |
) |
|
|
(4,676 |
) |
|
|
1.47 |
|
A |
|
|
2 |
|
|
|
100,000 |
|
|
|
95 |
|
|
|
(836 |
) |
|
|
(741 |
) |
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
4 |
|
|
$ |
384,000 |
|
|
$ |
108 |
|
|
$ |
(5,513 |
) |
|
$ |
(5,405 |
) |
|
|
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the S&P Long-Term Issuer Credit Ratings. |
|
(2) |
|
Based on legal entities. Affiliated legal entities are reported separately. |
|
(3) |
|
For each counterparty, this amount includes derivatives with a positive fair value
including the related accrued interest receivable/payable (net.) |
Credit Risk
Doral Financial is subject to credit risk, particularly with respect to its investment securities
and loans receivable. For a discussion of credit risk on investment securities refer to Note 7 of
the accompanying financial statements.
Loans receivable are loans that Doral Financial holds for investment and, therefore, the Company is
at risk for credit loss over the term of the loans. Because many of the Companys loans are made to
borrowers located in Puerto Rico and secured by properties located in Puerto Rico, the Company is
subject to credit risk tied to adverse economic, political or business developments and natural
hazards, such as hurricanes, that may affect Puerto Rico. The Puerto Rico economy has been in a
recession since 2006. This has affected borrowers disposable incomes and their ability to make
payments when due, causing an increase in delinquency and foreclosure rates. The Company believes
that these conditions will continue to affect its credit quality. In addition, there is evidence
that property values have declined from their peak. This has reduced borrowers capacity to
refinance and increased the exposure to loss upon default. This decline in prices and increases in
expected defaults are incorporated into the loss rates used for calculating the Companys allowance
for loan and lease losses. The Company also has a growing portfolio of commercial and construction
and land loans, geographically dominated by loans in the New York Metropolitan area, and
performance of such loans is subject to the strength of the New York City and US economy.
With respect to mortgage loans originated for sale as part of its mortgage banking business, Doral
Financial is generally at risk for any mortgage loan default from the time it originates the
mortgage loan until the time it sells the loan or packages it into a MBS. For residential mortgage
loans that are retained as a loan investment, Doral retains the credit risk from the time the loan
is originated until the loan is paid. With respect to FHA loans, Doral Financial is fully insured
as to principal by the FHA against foreclosure loss. VA loans are guaranteed within a range of 25%
to 50% of the principal amount of the loan subject to a
maximum, ranging from $22,500 to $50,750, in addition to the mortgage collateral. Prior to 2006,
the Company sold loans on a recourse basis as part of the ordinary course of business. As part of
such transactions, the Company committed to make payments to remedy loan defaults or to repurchase
defaulted loans. Refer to Off-Balance Sheet Activities above for additional information regarding
recourse obligations. In mid 2005, the Company discontinued the practice of selling mortgage loans
with recourse, except for recourse related to early payment defaults.
102
The residential mortgage portfolio includes loans that, at some point were repurchased pursuant to
recourse obligations and, as a result, have a higher credit risk. Repurchases of delinquent loans
from recourse obligations for the quarter and six month periods ended June 30, 2011 totaled $1.4
million and $5.8 million, respectively, and resulted in a loss of $0.4 million and $0.6 million for
the corresponding periods. When repurchased from recourse obligations, loans are recorded at their
market value, which includes a discount for poor credit performance.
Historically, Doral Financial provided land acquisition, development, and construction financing to
developers of residential housing projects and, as consequence, has credit risk exposure to this
sector. Construction loans extended to developers are typically adjustable rate loans, indexed to
the prime interest rate with terms ranging generally from 12 to 36 months. Doral Financial
principally targeted developers of residential construction for single-family primary-home
occupancy. As a result of the negative outlook for the Puerto Rico economy and its adverse effect
on the construction industry, in the fourth quarter of 2007, the Company ceased financing new
housing projects in Puerto Rico. The recorded balance for the residential housing construction
sector has decreased from $181.5 million as of December 31, 2010, to $158.0 million as of June 30,
2011. Management expects that the amount of construction loans will continue to decrease in future
years.
Puerto Rico and the Company have experienced low levels of new home absorption in recent periods
due to the recession in Puerto Rico. As a result, in September 2010, the Governor of Puerto Rico
signed into law Act No. 132 of 2010 which established various housing tax and other incentives to
stimulate the sale of new and existing housing units. Act No. 115 of July 5, 2011 amended Act No.
132 to extend the expiration of the housing tax and other incentives from June 30, 2011 to October
31, 2011. The tax and other incentives, which include incentives or reductions relating to capital
gains taxes, property taxes and property recording fees and stamps, will be in effect through October 31,
2011 and have had a favorable impact in the current economic environment in Puerto Rico. The six month
period ended June 30, 2011 reflected lower UPB in land acquisition, development, and construction
financing performing and non-performing loans compared to December 31, 2010.
For the six month period ended June 30, 2011, the commercial real estate portfolio experienced an
increase in late stage delinquency mainly attributed to adverse performance of the small commercial
portfolio related to the continued recessionary conditions in Puerto Rico. Management has taken
certain actions to mitigate the risk in the portfolio, including leveraging the collections and
loss-mitigation resources from the residential mortgage area to the small commercial area as well
as expanding advisory services of third party providers for the large commercial area in order to
work-out delinquent loans and prevent performing loans from becoming delinquent.
Loan modifications and troubled debt restructurings
With Puerto Rico unemployment of 15.1%, many borrowers have temporarily lost the means to pay their
loan contractual principal and interest obligations. As a result of the economic hardships, a
number of borrowers have defaulted on their debt obligations, including residential mortgage and
consumer loans. The lower level of income and economic activity has also led to fewer new
construction residential home sales, increased commercial real estate vacancy, and lower business
revenues, which has led to increased defaults on commercial real estate, construction and land
loans. Dorals management has concluded that it is in the Companys best interest, and in the best
interest of the Puerto Rican economy and citizenry, if certain defaulted loans are restructured in
a manner that keeps borrowers in their homes, or businesses operating, rather than foreclosing on
the loan collateral if it is concluded that the borrowers payment difficulties are temporary and
Doral will in time collect the loan principal and agreed upon interest.
Doral has created a number of loan modification programs to help borrowers stay in their homes and
operate their businesses which also optimizes borrower performance and returns to Doral. In these
cases, the restructure or loan modification fits the definition of Troubled Debt Restructuring
(TDR) as defined by ASC 310-40, Receivables Troubled Debt Restructuring by Creditors. TDRs are
accounted for based on the provisions of ASC 310-10-35, Receivables-Measurement of Loan Impairment.
The programs are designed to provide temporary relief and, if necessary, longer term financial
relief to the consumer loan customer. Dorals consumer loan loss mitigation program (including
consumer loan products and residential mortgage loans), grants a concession for economic or legal
reasons related to the borrowers financial difficulties Doral would not otherwise consider.
Dorals loss mitigation programs can provide for one or a combination of the following: movement of
unpaid principal and interest to the end of the loan, extension of the loan term for up to ten
years, deferral of principal payments for a period of time, and reduction of interest rates either
permanently (feature discontinued in 2010) or for a period of up to two years. No programs adopted
by Doral provide for the forgiveness of contractually due principal or interest. Deferred principal
and
uncollected interest are added to the end of the loan term at the time of the restructuring and
uncollected interest is not recognized as income until collected when the loan is paid off. Doral
wants to make these programs available only to those borrowers who have defaulted, or are likely to
default, permanently on their loan and would lose their homes in foreclosure action absent some
lender concession. However, Doral will move borrowers and properties to foreclosure if the Company
is not reasonably assured
103
that the borrower will be able to repay all contractual principal or
interest (which is not forgiven in part or whole in any current program).
Regarding the commercial loan loss mitigation programs (including commercial real estate,
commercial, land and construction loan portfolios), the determination is made on a loan by loan
basis at the time of restructuring as to whether a concession was made for economic or legal
reasons related to the borrowers financial difficulty that Doral would not otherwise consider.
Concessions made for commercial loans could include reductions in interest rates, extensions of
maturity, waiving of borrower covenants, or other contract changes that would be considered a
concession. Doral mitigates loan defaults for its commercial loan portfolios loans through its Loan
Workout function. The functions objective is to minimize losses upon default of larger credit
relationships. The group uses relationship officers, collection specialists, attorneys and third
party service providers to supplement its internal resources. In the case of residential
construction projects, the workout function monitors project specifics, such as project management
and marketing. Residential, other consumer or commercial loan modifications can result in returning
a loan to accrual status when the criteria for returning a loan to performing status are met. Loan
modifications also increase Dorals interest income by returning a non-performing loan to
performing status and cash flows by providing for payments to be made by the borrower, and
decreases foreclosure and OREO costs by decreasing the number of foreclosed properties. Doral
continues to consider a modified loan as a non-performing asset for purposes of estimating its
allowance for loan and lease losses until the borrower has made at least six consecutive
contractual payments. At such time the loan will be treated as any other performing loan for
purposes of estimating the allowance for loan and lease losses.
Loan modifications that are considered troubled debt restructurings completed as of June 30, 2011
and December 31, 2010 were as follows (all loan modifications are related to loans to Puerto Rico
residents):
Table X Loan modifications considered TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
90 days and over |
|
|
|
|
|
|
90 days and over |
|
(In thousands) |
|
TDRs |
|
|
delinquency |
|
|
TDRs |
|
|
delinquency |
|
Consumer modifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage(1) |
|
$ |
713,093 |
|
|
$ |
77,388 |
|
|
$ |
740,889 |
|
|
$ |
142,213 |
|
Other consumer |
|
|
1,098 |
|
|
|
432 |
|
|
|
1,257 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
714,191 |
|
|
|
77,820 |
|
|
|
742,146 |
|
|
|
142,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
84,326 |
|
|
$ |
16,841 |
|
|
$ |
71,501 |
|
|
$ |
31,314 |
|
Commercial and industrial |
|
|
9,663 |
|
|
|
|
|
|
|
5,568 |
|
|
|
71 |
|
Construction and land |
|
|
82,766 |
|
|
|
24,957 |
|
|
|
78,847 |
|
|
|
36,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
176,755 |
|
|
|
41,798 |
|
|
|
155,916 |
|
|
|
67,823 |
|
|
Total TDRs |
|
$ |
890,946 |
|
|
$ |
119,618 |
|
|
$ |
898,062 |
|
|
$ |
210,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
As of December 31, 2010 includes $55.5 million of loan modifications
not previously reported as TDRs.
The decrease in residential mortgage TDRs in June 30, 2011 compared to December 31, 2010 is due to the removal from TDR classification of restructured loans that are in
compliance with their modified terms and yield a market rate in calendar years after the
year in which the restructuring took place.
A significant portion of Dorals restructured residential mortgage loans were current,
paid-off or re-modified as of June 30, 2011, as illustrated by the table of restructured loans that
are non-performing at June 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 days and over |
|
|
Percentage of |
|
|
|
Original UPB of |
|
|
Remaining UPB of |
|
|
delinquent at |
|
|
restructured UPB |
|
Year restructured |
|
restructured loans(1) |
|
|
restructured loans |
|
|
June 30, 2011 (2) |
|
|
90 days and over |
|
2007 |
|
$ |
5,941 |
|
|
$ |
5,922 |
|
|
$ |
623 |
|
|
|
10.5 |
% |
2008 |
|
|
47,605 |
|
|
|
44,494 |
|
|
|
10,379 |
|
|
|
23.5 |
% |
2009 |
|
|
121,523 |
|
|
|
117,230 |
|
|
|
26,491 |
|
|
|
22.6 |
% |
2010 |
|
|
420,915 |
|
|
|
411,648 |
|
|
|
37,029 |
|
|
|
9.0 |
% |
2011 |
|
|
137,007 |
|
|
|
133,799 |
|
|
|
2,866 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
732,991 |
|
|
$ |
713,093 |
|
|
$ |
77,388 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excluding loans subject to a second restructure. |
|
(2) |
|
Using bank regulatory definition of four or more payments past due.
|
104
Non-performing Loans
Non-performing assets consist of loans on non-accrual basis, other real estate owned and other
non-performing assets. Doral discontinues interest income recognition and considers financial
assets non-performing when they are 90 days or more past due, except for revolving lines of credit
and credit cards which are considered non-performing when they are 180 days or more past due, FHA
and VA loans which are considered non-performing when they are 270 days past due, and certain loans
determined to be well collateralized so that ultimate collection of principal and interest is not
in question (current loan and interest balance as a percentage of collateral value is less than
60%). In addition, any financial asset for which management estimates it will not collect
contractual principal or interest is considered non-performing when such judgment is made. When
income recognition is discontinued for a loan, all accrued but unpaid interest to date is reversed
against current period income. Such interest, if collected in the future, is credited to income in
the period of the recovery, and the loan returns to accrual status when it becomes current and/or
collectability is reasonably assured. The Company also places in non-accrual status all residential
construction loans classified as substandard whose sole source of payment is interest reserves
funded by Doral Financial. For the quarter and six month period ended June 30, 2011, the Company
would have recognized $20.9 million and $12.1 million, respectively, compared to $14.4 million and
$24.9 million for the corresponding 2010 periods, in additional interest income had all delinquent
loans been accounted for on an accrual basis. This amount includes interest reversal on loans
placed on non-accrual status during the period.
For consumer loans (primarily residential real estate), all of Dorals loss mitigation tools
require that the borrower demonstrate the intent and ability to pay principal and interest on the
loan. Doral must receive at least three consecutive monthly payments prior to qualifying the
borrower for a loss mitigation product. Dorals loan underwriters must be reasonably assured of the
borrowers future repayment and performance from their review of the borrowers circumstances, and
when all the conditions are met, the customer is approved for a loss mitigation product and placed
on a probation period. When the loan is returned to accrual status, Doral reviews the loan on a
monthly basis to ensure that payments are made during the probationary period. If a payment is not
made during this probationary period the loan is immediately returned to non-accrual status. Also,
if a payment is missed during the probationary period, the loan reverts to its original terms, and
collections/foreclosure procedures begin from the point at which they stood prior to the
restructure. Consumer loans not delinquent 90 days or more that are eligible for loss mitigation
products are subject to the same requirements as the delinquent consumer loans except the receipt
of the three months of payment in advance of the restructures is waived.
For commercial loan loss mitigation (which includes commercial real estate, commercial and
industrial, construction and land loans), the loans are underwritten by the Collections or
Commercial function, depending on the loss-mitigation alternative, the intent and ability of the
borrower to service the debt under the revised terms scrutinized, and if approved for the TDR, the
borrower is placed on a six month probationary period during which the customer is required to make
six consecutive payments (or equivalent in a lump sum) before the loan is returned to accrual
status. Upon receiving six consecutive months of payments, the commercial loan is returned to
accrual status. If the loan was in accrual status at the time of the TDR, the loan is kept in
accrual status if the ultimate collection of principal and interest is not in question, and placed
in a probationary period. If a payment is missed during the probationary period, the loan reverts
to its original terms and collections/foreclosure procedures begin from the point at which they
stood prior to the restructure.
105
The following table sets forth information with respect to Doral Financials non-performing loans,
OREO and other NPAs as of the dates indicated:
Table Y Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(In thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
Non-performing consumer, excluding FHA/VA (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
279,529 |
|
|
$ |
820 |
|
|
$ |
280,349 |
|
|
$ |
278,675 |
|
|
$ |
2,166 |
|
|
$ |
280,841 |
|
Lease financing receivables |
|
|
199 |
|
|
|
|
|
|
|
199 |
|
|
|
415 |
|
|
|
|
|
|
|
415 |
|
Other consumer (2) |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
404 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing consumer, excluding
FHA/VA |
|
|
280,228 |
|
|
|
820 |
|
|
|
281,048 |
|
|
|
279,494 |
|
|
|
2,166 |
|
|
|
281,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
167,643 |
|
|
|
|
|
|
|
167,643 |
|
|
|
193,556 |
|
|
|
|
|
|
|
193,556 |
|
Commercial and industrial |
|
|
2,731 |
|
|
|
|
|
|
|
2,731 |
|
|
|
2,522 |
|
|
|
|
|
|
|
2,522 |
|
Construction and land |
|
|
107,516 |
|
|
|
1,610 |
|
|
|
109,126 |
|
|
|
147,127 |
|
|
|
1,610 |
|
|
|
148,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing commercial |
|
|
277,890 |
|
|
|
1,610 |
|
|
|
279,500 |
|
|
|
343,205 |
|
|
|
1,610 |
|
|
|
344,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans, excluding FHA/VA |
|
$ |
558,118 |
|
|
$ |
2,430 |
|
|
$ |
560,548 |
|
|
$ |
622,699 |
|
|
$ |
3,776 |
|
|
$ |
626,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO and repossessed units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
53,381 |
|
|
$ |
|
|
|
$ |
53,381 |
|
|
$ |
63,794 |
|
|
$ |
|
|
|
$ |
63,794 |
|
Commercial |
|
|
20,163 |
|
|
|
|
|
|
|
20,163 |
|
|
|
17,599 |
|
|
|
|
|
|
|
17,599 |
|
Construction and land |
|
|
27,305 |
|
|
|
650 |
|
|
|
27,955 |
|
|
|
18,230 |
|
|
|
650 |
|
|
|
18,880 |
|
Other |
|
|
111 |
|
|
|
|
|
|
|
111 |
|
|
|
75 |
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OREO and repossessed units |
|
$ |
100,960 |
|
|
$ |
650 |
|
|
$ |
101,610 |
|
|
$ |
99,698 |
|
|
$ |
650 |
|
|
$ |
100,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing FHA/VA guaranteed residential(1)(3)(4) |
|
$ |
79,179 |
|
|
$ |
|
|
|
$ |
79,179 |
|
|
$ |
121,305 |
|
|
$ |
|
|
|
$ |
121,305 |
|
Other non-performing assets |
|
|
3,204 |
|
|
|
|
|
|
|
3,204 |
|
|
|
3,692 |
|
|
|
|
|
|
|
3,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets (5) |
|
$ |
741,461 |
|
|
$ |
3,080 |
|
|
$ |
744,541 |
|
|
$ |
847,394 |
|
|
$ |
4,426 |
|
|
$ |
851,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs as a percentage of the loan portfolio, net, and OREO (excluding
GNMA defaulted loans) |
|
|
|
|
|
|
|
|
|
|
12.73 |
% |
|
|
|
|
|
|
|
|
|
|
14.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs as a percentage of consolidated total assets |
|
|
|
|
|
|
|
|
|
|
9.29 |
% |
|
|
|
|
|
|
|
|
|
|
9.85 |
% |
Total non-performing loans to total loans (excluding GNMA defaulted loans and
FHA/VA guaranteed loans) |
|
|
|
|
|
|
|
|
|
|
9.85 |
% |
|
|
|
|
|
|
|
|
|
|
11.29 |
% |
Ratio of allowance for loan and lease losses to total non-performing loans
(excluding loans held for sale) at end of period (5) |
|
|
|
|
|
|
|
|
|
|
16.75 |
% |
|
|
|
|
|
|
|
|
|
|
19.82 |
% |
|
|
|
(1) |
|
FHA/VA delinquent loans are separated from the non-performing loans that present
substantial credit risk to the Company in order to recognize the different risk of loss
presented by these assets. |
|
(2) |
|
Includes delinquency related personal, revolving lines of credit and other consumer
loans. |
|
(3) |
|
Does not include approximately $115.3 million and $112.8 million of GNMA defaulted
loans over 90 days delinquent (for which the Company has the option, but not an obligation, to
buy back from the pools serviced), included as part of the loans held for sale portfolio as of
June 30, 2011 and December 31, 2010, respectively. |
|
(4) |
|
FHA loans are placed in accrual status until 270 days delinquent because the
principal balance of these loans is insured or guaranteed under applicable FHA program and
interest is, in most cases, fully recovered in foreclosures proceedings. Accordingly, total
non-performing FHA guaranteed residential mortgage loans exclude $16.8 million and $31.5
million of FHA loans as of June 30, 2011 and December 31, 2010, respectively, that were 90
days or more past due. |
|
(5) |
|
Excludes FHA and VA claims amounting to $15.2 million and $12.5 million as of June
30, 2011 and December 31, 2010, respectively. |
106
The following tables provide the non-performing loans activity by portfolio for the periods
indicated.
Table Z Non-Performing Loans Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2011 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
Construction |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
and Land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
254,942 |
|
|
$ |
551 |
|
|
$ |
255,493 |
|
|
$ |
187,076 |
|
|
$ |
126,190 |
|
|
$ |
2,789 |
|
|
$ |
316,055 |
|
|
$ |
571,548 |
|
Additions |
|
|
74,441 |
|
|
|
780 |
|
|
|
75,221 |
|
|
|
9,884 |
|
|
|
1,883 |
|
|
|
859 |
|
|
|
12,626 |
|
|
|
87,847 |
|
Repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remediated/Cure |
|
|
(46,395 |
) |
|
|
(450 |
) |
|
|
(46,845 |
) |
|
|
(17,271 |
) |
|
|
(214 |
) |
|
|
(457 |
) |
|
|
(17,942 |
) |
|
|
(64,787 |
) |
Foreclosed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,628 |
) |
|
|
|
|
|
|
|
|
|
|
(3,628 |
) |
|
|
(3,628 |
) |
Write-downs |
|
|
(2,639 |
) |
|
|
(182 |
) |
|
|
(2,821 |
) |
|
|
(8,418 |
) |
|
|
(18,733 |
) |
|
|
(460 |
) |
|
|
(27,611 |
) |
|
|
(30,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
280,349 |
|
|
$ |
699 |
|
|
$ |
281,048 |
|
|
$ |
167,643 |
|
|
$ |
109,126 |
|
|
$ |
2,731 |
|
|
$ |
279,500 |
|
|
$ |
560,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2010 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
Construction |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
and land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
407,256 |
|
|
$ |
1,148 |
|
|
$ |
408,404 |
|
|
$ |
157,443 |
|
|
$ |
304,413 |
|
|
$ |
1,908 |
|
|
$ |
463,764 |
|
|
$ |
872,168 |
|
Additions |
|
|
84,768 |
|
|
|
1,373 |
|
|
|
86,141 |
|
|
|
24,011 |
|
|
|
60,058 |
|
|
|
2,312 |
|
|
|
86,381 |
|
|
|
172,522 |
|
Repurchases |
|
|
6,672 |
|
|
|
|
|
|
|
6,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,672 |
|
Remediated/Cure |
|
|
(65,211 |
) |
|
|
(737 |
) |
|
|
(65,948 |
) |
|
|
(9,402 |
) |
|
|
(69,780 |
) |
|
|
(877 |
) |
|
|
(80,059 |
) |
|
|
(146,007 |
) |
Foreclosed |
|
|
(19,833 |
) |
|
|
|
|
|
|
(19,833 |
) |
|
|
(1,386 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
(1,490 |
) |
|
|
(21,323 |
) |
Write-downs |
|
|
(10,676 |
) |
|
|
(722 |
) |
|
|
(11,398 |
) |
|
|
(1,423 |
) |
|
|
(39,488 |
) |
|
|
|
|
|
|
(40,911 |
) |
|
|
(52,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
402,976 |
|
|
$ |
1,062 |
|
|
$ |
404,038 |
|
|
$ |
169,243 |
|
|
$ |
255,099 |
|
|
$ |
3,343 |
|
|
$ |
427,685 |
|
|
$ |
831,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
Construction |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
and Land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
280,841 |
|
|
$ |
819 |
|
|
$ |
281,660 |
|
|
$ |
193,556 |
|
|
$ |
148,737 |
|
|
$ |
2,522 |
|
|
$ |
344,815 |
|
|
$ |
626,475 |
|
Additions |
|
|
121,702 |
|
|
|
1,662 |
|
|
|
123,364 |
|
|
|
24,647 |
|
|
|
4,625 |
|
|
|
1,873 |
|
|
|
31,145 |
|
|
|
154,509 |
|
Repurchases |
|
|
2,628 |
|
|
|
|
|
|
|
2,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,628 |
|
Remediated/Cure |
|
|
(107,317 |
) |
|
|
(1,101 |
) |
|
|
(108,418 |
) |
|
|
(36,592 |
) |
|
|
(10,006 |
) |
|
|
(1,185 |
) |
|
|
(47,783 |
) |
|
|
(156,201 |
) |
Foreclosed |
|
|
(11,640 |
) |
|
|
|
|
|
|
(11,640 |
) |
|
|
(5,550 |
) |
|
|
(13,907 |
) |
|
|
|
|
|
|
(19,457 |
) |
|
|
(31,097 |
) |
Write-downs |
|
|
(5,865 |
) |
|
|
(681 |
) |
|
|
(6,546 |
) |
|
|
(8,418 |
) |
|
|
(20,323 |
) |
|
|
(479 |
) |
|
|
(29,220 |
) |
|
|
(35,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of
period |
|
$ |
280,349 |
|
|
$ |
699 |
|
|
$ |
281,048 |
|
|
$ |
167,643 |
|
|
$ |
109,126 |
|
|
$ |
2,731 |
|
|
$ |
279,500 |
|
|
$ |
560,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
FHA/VA |
|
|
Other |
|
|
Total |
|
|
Commercial |
|
|
Construction |
|
|
and |
|
|
Total |
|
|
|
|
(In thousands) |
|
Residential |
|
|
Consumer |
|
|
Consumer |
|
|
Real Estate |
|
|
and land |
|
|
Industrial |
|
|
Commercial |
|
|
Total |
|
Balance at beginning of period |
|
$ |
397,698 |
|
|
$ |
1,610 |
|
|
$ |
399,308 |
|
|
$ |
130,811 |
|
|
$ |
306,954 |
|
|
$ |
933 |
|
|
$ |
438,698 |
|
|
$ |
838,006 |
|
Additions |
|
|
162,930 |
|
|
|
2,020 |
|
|
|
164,950 |
|
|
|
62,638 |
|
|
|
103,861 |
|
|
|
3,708 |
|
|
|
170,207 |
|
|
|
335,157 |
|
Repurchases |
|
|
11,864 |
|
|
|
|
|
|
|
11,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,864 |
|
Remediated/Cure |
|
|
(123,632 |
) |
|
|
(1,846 |
) |
|
|
(125,478 |
) |
|
|
(18,256 |
) |
|
|
(115,081 |
) |
|
|
(1,075 |
) |
|
|
(134,412 |
) |
|
|
(259,890 |
) |
Foreclosed |
|
|
(32,138 |
) |
|
|
|
|
|
|
(32,138 |
) |
|
|
(4,271 |
) |
|
|
(1,116 |
) |
|
|
(25 |
) |
|
|
(5,412 |
) |
|
|
(37,550 |
) |
Write-downs |
|
|
(13,746 |
) |
|
|
(722 |
) |
|
|
(14,468 |
) |
|
|
(1,679 |
) |
|
|
(39,520 |
) |
|
|
(198 |
) |
|
|
(41,397 |
) |
|
|
(55,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
402,976 |
|
|
$ |
1,062 |
|
|
$ |
404,038 |
|
|
$ |
169,243 |
|
|
$ |
255,098 |
|
|
$ |
3,343 |
|
|
$ |
427,684 |
|
|
$ |
831,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
Non-performing loans (excluding FHA/VA loans guaranteed by the US government) as of June 30,
2011 were $560.5 million, a decrease of $65.9 million and $271.2 million from December 31, 2010 and
June 30, 2010, respectively. Major fluctuations during the period ended June 30, 2011 are reflected
in the commercial and industrial and the construction and land portfolios, with decreases of $25.9
million and $39.6 million, respectively. The six month period ended June 30, 2011 reflected decreases of $122.6
million and $146.0 million in the residential mortgage and construction and land portfolios, respectively.
Non-performing loans have decreased during 2011 due to collection efforts and loan restructuring
resulting returning loans to current status. Additionally, second quarter 2011 charge-offs totaled
$40.4 million compared to the second quarter 2010 charge-offs of $57.5 million. Historically,
Dorals charge-off policy has been to reduce the reported balance of a collateral dependent loan (a
loan is collateral dependent when the liquidation of collateral is considered the likely source of
repayment of a delinquent loan) by a charge to the allowance for loan and lease losses upon receipt
of a current market appraised value. However, due to long delays in receiving new market value
appraisals of properties in Puerto Rico, Doral implemented a methodology to estimate market values
for all properties based upon the changes in market values in new appraisals it has received.
During the second quarter of 2011, Doral adopted the practice of charging off the excess of the
loan balance before charge-off over the estimated fair value of the property collateralizing the
loan considered uncollectible. This new practice also reduces the reported allowance for loan and
lease losses and the coverage ratios that exclude the amount previously charged-off.
Non-performing assets, including non-performing loans (discussed above), decreased by $107.2
million, or 12.5%, as of June 30, 2011, compared to December 31, 2010. The decrease in
non-performing loans compared to December 31, 2010 was complemented by a decrease in non-performing
FHA/VA guaranteed loans of $42.1 million. As of June 30, 2011, Doral reported a total of $280.4
million of non-performing residential loans excluding FHA/VA guaranteed loans, which represents
7.7% of total residential loans (excluding FHA/VA guaranteed loans) and 50.0% of total
non-performing loans.
Doral Financial does not hold a significant amount of adjustable interest rate, negative
amortization, or other exotic credit features that are common in other parts of the United States.
However, as part of its loss mitigation programs, the Company has granted certain concessions to
borrowers in financial difficulties that have proven payment capacity which may include interest
only periods or temporary interest rate reductions. The payments for these loans will reset at the
former payment amount unless the loan is restructured again or the restructured terms are extended.
Substantially all residential mortgage loans are conventional 30 and 15 year amortizing fixed rate
loans at origination. There has been significantly less fade in residential real estate values in
homes under $250,000 in Puerto Rico, the price point for the preponderance of Dorals residential
mortgage loan portfolio. The following table shows the composition of the mortgage non-performing
loans according to their actual loan-to-value (LTV) and whether they are covered by mortgage
insurance. LTV ratios are calculated based on current unpaid balances and original property values.
Table AA
Composition of Mortgage Non-Performing Loans
June 30, 2011
|
|
|
|
|
|
|
|
|
Collateral Type |
|
Loan To Value |
|
Distribution |
FHA/VA loans |
|
|
n/a |
|
|
|
23.9 |
% |
Loans with private mortgage insurance |
|
|
n/a |
|
|
|
5.6 |
% |
Loans with no mortgage insurance |
|
|
< 60 |
% |
|
|
8.1 |
% |
|
|
|
61-80 |
% |
|
|
21.2 |
% |
|
|
|
81-90 |
% |
|
|
13.9 |
% |
|
|
Over 91% |
|
|
27.3 |
% |
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Actual LTV ratios, calculated based on current unpaid balances and original property values,
are considered when establishing the levels of general reserves for the residential mortgage
portfolio. Assumed loss severity fluctuates depending on the different LTV levels of individual
loans.
Dorals construction and land loan portfolio reflected a decrease in non-performing loans due
primarily to charge-offs of $21.8 million and $23.4 million during the quarter and six month
periods ended on June 30, 2011. Construction and land had non-performing loans of $109.1 million as
of June 30, 2011, or 19.5% (98.5% of which are in Puerto Rico), of total non-performing loans. As
of June 30, 2011 and December 31, 2010, 27.9% and 32.4%, respectively, of the loans within the
construction and land portfolio were considered non-performing loans.
The sale of a portion of the construction
loan portfolio during 2010 reduced the Companys risk to this sector, however, the remaining
construction portfolio is directly affected by the continuing Puerto Rico recession as the
underlying loans repayment capacity is dependent on the ability to attract buyers.
108
During the past two years, the Companys construction and land loan portfolio has experienced a
significant increase in default rates resulting from borrowers not being able to sell finished
units within the loan term. Although the Company has taken (and continues to take) steps to
mitigate the credit risk underlying these loans, their ultimate performance will be affected by
each borrowers ability to complete the project, maintain the pricing level of the housing units
within the project, and sell the inventory of units within a reasonable timeframe.
During 2010 and the six month period ended June 30, 2011, Doral Financial did not enter into
commitments to fund new construction loans for residential housing projects in Puerto Rico, other
than a new commitment amounted to $124.9 million entered during the third quarter of 2010, related
to the sale of an asset portfolio to a third party on July 2010, consisting of performing and
non-performing late-stage residential construction and development loans and real estate.
Commitments to fund new construction loans in the US totaled $2.4 million and $39.4 million for the
quarter and six month period ended June 30, 2011, compared to $23.3 million and $41.1 million for
the corresponding 2010 period.
The following table presents further information on the Companys construction portfolio.
Table BB Construction and land loan portfolio analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
(In thousands) |
|
PR |
|
US |
|
Total |
|
PR |
|
US |
|
Total |
Residential construction loans |
|
$ |
157,915 |
|
|
$ |
300 |
|
|
$ |
158,215 |
|
|
$ |
181,240 |
|
|
$ |
300 |
|
|
$ |
181,540 |
|
Multi-family, condominium, commercial and land
construction loans |
|
|
151,675 |
|
|
|
80,030 |
|
|
|
231,705 |
|
|
|
168,659 |
|
|
|
108,535 |
|
|
|
277,194 |
|
Undisbursed funds under existing commitments (1) |
|
|
47,114 |
|
|
|
15,495 |
|
|
|
62,609 |
|
|
|
44,336 |
|
|
|
9,539 |
|
|
|
53,875 |
|
Total non-performing |
|
|
107,516 |
|
|
|
1,610 |
|
|
|
109,126 |
|
|
|
147,127 |
|
|
|
1,610 |
|
|
|
148,737 |
|
Net charge offs |
|
|
23,359 |
|
|
|
|
|
|
|
23,359 |
|
|
|
54,944 |
|
|
|
991 |
|
|
|
55,935 |
|
Allowance for loan losses |
|
|
9,634 |
|
|
|
1,516 |
|
|
|
11,151 |
|
|
|
22,761 |
|
|
|
2,265 |
|
|
|
25,026 |
|
Non-performing construction to total construction
loans |
|
|
34.73 |
% |
|
|
2.00 |
% |
|
|
27.99 |
% |
|
|
42.05 |
% |
|
|
1.48 |
% |
|
|
32.42 |
% |
Net charge-offs on an annualized basis to total construction
loans |
|
|
15.22 |
% |
|
|
|
% |
|
|
12.08 |
% |
|
|
15.70 |
% |
|
|
0.91 |
% |
|
|
12.19 |
% |
|
|
|
(1) |
|
Includes undisbursed funds to matured loans and loans in non-accrual status that are
still active. |
The following table sets forth information with respect to the Companys loans past due 90
days and still accruing as of the dates indicated. Loans included in this table are 90 days or more
past due as to interest or principal and still accruing, because they are either well-secured and
in the process of collection or charged-off prior to being placed in non-accrual status.
Table CC Loans past due 90 days and still accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(In thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
Consumer loans past due 90 days and still accruing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Credit cards (2) |
|
|
960 |
|
|
|
|
|
|
|
960 |
|
|
|
973 |
|
|
|
|
|
|
|
973 |
|
Other consumer (3) |
|
|
1,059 |
|
|
|
|
|
|
|
1,059 |
|
|
|
1,022 |
|
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans past due 90 days and still accruing |
|
|
2,019 |
|
|
|
|
|
|
|
2,019 |
|
|
|
1,995 |
|
|
|
|
|
|
|
1,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans past due 90 days and still accruing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
655 |
|
|
|
|
|
|
|
655 |
|
|
|
560 |
|
|
|
|
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90 days and still accruing |
|
$ |
2,674 |
|
|
$ |
|
|
|
$ |
2,674 |
|
|
$ |
2,555 |
|
|
$ |
|
|
|
$ |
2,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $16.8 million and $31.5 million, FHA/VA guaranteed residential mortgages
past due 90 days and still accruing, as of June 30, 2011 and December 31, 2010, respectively. |
|
(2) |
|
Credit cards until 180 days delinquent. |
|
(3) |
|
Revolving lines of credit until 180 days delinquent. |
109
Detailed below is information on loans 30 to 89 days past due as of the periods indicated.
This table excludes GNMA defaulted loans 30 to 89 days past due (for which the Company has the
option, but not an obligation, to buy back from the pools serviced) and FHA/VA guaranteed loans.
Table DD Loans past due 30-89 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(In thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
Total |
|
Past-due 30-89 days consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (1) |
|
$ |
87,545 |
|
|
$ |
|
|
|
$ |
87,545 |
|
|
$ |
71,750 |
|
|
$ |
|
|
|
$ |
71,750 |
|
Lease financing receivables |
|
|
219 |
|
|
|
|
|
|
|
219 |
|
|
|
245 |
|
|
|
|
|
|
|
245 |
|
Other consumer |
|
|
804 |
|
|
|
|
|
|
|
804 |
|
|
|
1,343 |
|
|
|
|
|
|
|
1,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past-due consumer |
|
|
88,568 |
|
|
|
|
|
|
|
88,568 |
|
|
|
73,338 |
|
|
|
|
|
|
|
73,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past-due 30-89 days commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
35,057 |
|
|
|
|
|
|
|
35,057 |
|
|
|
35,353 |
|
|
|
|
|
|
|
35,353 |
|
Construction and land |
|
|
3,235 |
|
|
|
|
|
|
|
3,235 |
|
|
|
2,286 |
|
|
|
|
|
|
|
2,286 |
|
Commercial and industrial |
|
|
366 |
|
|
|
|
|
|
|
366 |
|
|
|
3,900 |
|
|
|
|
|
|
|
3,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past-due commercial |
|
|
38,658 |
|
|
|
|
|
|
|
38,658 |
|
|
|
41,539 |
|
|
|
|
|
|
|
41,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past-due loans (2) |
|
$ |
127,226 |
|
|
$ |
|
|
|
$ |
127,226 |
|
|
$ |
114,877 |
|
|
$ |
|
|
|
$ |
114,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $3.6 million and $7.4 million of FHA/VA guaranteed loans. |
|
(2) |
|
Regulatory guidance regarding days past due followed by many banks provides
that the number of days past due may be based upon the number of payments missed. According to
this regulatory guidance, monthly pay loans are reported as 30 days past due when the borrower
has missed two payments. Doral follows this guidance in its reporting except that it more
conservatively reports loans 90 days past due based upon the contractual number of days past
due. |
Other Real Estate Owned
Doral Financial believes that the value of the OREO reflected in its Consolidated Statements of
Financial Condition represents a reasonable estimate of the properties sales price, net of
disposition costs. The fair value of the OREO is normally determined on the basis of internal and
external appraisals and physical inspections. A loss is recognized for any initial write down to
fair value less cost to sell. Any losses in the carrying value of the properties arising from
periodic appraisals are charged to expense in the period incurred. Holding costs, property taxes,
maintenance and other similar expenses are charged to expense in the period incurred.
OREO foreclosures have increased in recent periods as the volume of the NPLs has increased and as
Doral has shortened the period from the initiation of foreclosure to possession of property by
approximately 10 months. OREO sales improved in the second quarter of 2011 compared to 2010 due to
the Companys strategic decision to reduce pricing on the OREO portfolio in order to accelerate
sales. The accelerated disposition of OREO is expected to reduce the carrying costs of OREO.
During the six month period ended June 30, 2011, the Company sold 294 OREO properties, representing
$49.3 million in unpaid balance. Total proceeds amounted to $31.4 million, representing the
recovery of 62.1% and 62.6% of unpaid principal balance and appraised value, respectively. For the
six month period ended June 30, 2010, the Company sold 135 OREO properties, representing $14.3
million in unpaid principal balance. Total proceeds amounted to $12.2 million, representing the
recovery of 85.4% and 100.1% of unpaid principal balance and appraised value, respectively. Gains
and losses on sales of OREO are recognized in other expenses in the Companys Consolidated
Statements of Operations.
110
The following presents the activity of OREO for the periods indicated:
Table EE Other real estate owned activity
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
103,767 |
|
|
$ |
100,345 |
|
Additions |
|
|
22,368 |
|
|
|
37,368 |
|
Sales |
|
|
(22,147 |
) |
|
|
(6,161 |
) |
Retirements |
|
|
(1,882 |
) |
|
|
(1,735 |
) |
Lower of cost or market adjustments |
|
|
(607 |
) |
|
|
(26,640 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
101,499 |
|
|
$ |
103,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month period ended June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
100,273 |
|
|
$ |
94,219 |
|
Additions |
|
|
51,740 |
|
|
|
56,090 |
|
Sales |
|
|
(44,873 |
) |
|
|
(13,139 |
) |
Retirements |
|
|
(4,266 |
) |
|
|
(4,124 |
) |
Lower of cost or market adjustments |
|
|
(1,375 |
) |
|
|
(29,869 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
101,499 |
|
|
$ |
103,177 |
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses (ALLL)
The Company estimates and records its ALLL on a monthly basis. For all performing loans and
non-performing small balance homogeneous loans (including residential mortgages, consumer,
construction, commercial real estate and commercial under $1.0 million; and performing
construction, commercial real estate and commercial greater than $1.0 million) the ALLL is
estimated based upon estimated probability of default and loss given default by shared product
characteristics using the Companys historical experience. For larger construction, commercial real
estate and commercial loans (loan balance greater than $1.0 million) that are 90 or more days past
due or are, otherwise considered to be impaired, management estimates the related ALLL based upon
an analysis of each individual loans characteristics. The ALLL estimate methodologies are
described more fully in the following paragraphs.
Residential mortgage. The general allowance for residential mortgage loans is calculated based on
the probability that loans within different delinquency buckets will default and, in the case of
default, the extent of losses that the Company expects to realize. In determining the probabilities
of default, the Company considers recent experience of rolls of loans from one delinquency bucket
into the next. In determining the allowance for loan and lease losses for residential mortgage
loans, for purposes of forecasting the future behavior of the portfolio, the Company determined
that it should only use the roll-rates of relatively recent months, which reflect both, the
deteriorating economic conditions in Puerto Rico, and the effect of the Companys increased
collections efforts. Using the older historical performance would yield lower probabilities of
default that may not reflect recent macroeconomic trends and management changes. Severity of loss
is calculated based on historical results from foreclosure and ultimate disposition of collateral.
Historical results are adjusted for the Companys expectation of housing prices. Severity
assumptions for the residential portfolio range between 6% and 33% depending on the different loan
types and loan-to-value ratios, and up to 100% for second mortgages.
Construction, commercial real estate, commercial and industrial and land. The ALLL for performing
construction, commercial real estate, commercial and industrial and land is estimated considering
either the probability of the loan defaulting in the next twelve months and the estimated loss
incurred in the event of default or the loan quality assigned to each loan and the estimated
expected loss associated with that loan grade. The probability of a loan defaulting is based upon
the Companys experience in its current portfolio. The loss incurred upon default is based upon the
Companys actual experience in resolving defaulted loans.
Construction, commercial real estate, commercial and industrial and land loans with principal
balances greater than $1.0 million that are not performing, or when management estimates it may not
collect all contractual principal and interest, are considered impaired and are measured for
impairment individually.
The Company evaluates impaired loans and estimates the valuation allowance based on ASC 310-10-35
(formerly SAS 114). Commercial and construction loans over $1.0 million that are classified more
than 90 days past due, or when management is concerned about the collection of all contractual
amounts due, are evaluated individually for impairment. Loans are considered
111
impaired when, based
on current information and events it is probable that the borrower will not be able to fulfill its
obligation according to the contractual terms of the loan agreement. During the third quarter of
2010, given certain risk indicators, management individually reviewed for impairment all commercial
loans over $50,000 that were over 90 days past due and recorded an incremental provision of $3.0
million.
The impairment loss, if any, on each individual loan identified as impaired is generally measured
based on the present value of expected cash flows discounted at the loans effective interest rate.
As a practical expedient, impairment may be measured based on the loans observable market price,
or the fair value of the collateral, if the loan is collateral dependent. If foreclosure is
probable, accounting guidance requires the measurement of impairment to be based on the fair value
of the collateral. Since current appraisals were not available on all properties at quarter end,
management determined its loss reserve estimates for these loans by estimating the fair value of
the collateral. In doing so, management considered a number of factors including the price at
which individual units could be sold in the current market, the period of time over which the units
would be sold, the estimated cost to complete the units, the risks associated with completing and
selling the units, the required rate of return on investment a potential acquirer may have and
current market interest rates in the Puerto Rico market.
Consumer. The ALLL for consumer loans is estimated based upon the historical charge-off rate using
the Companys historical experience. The ALLL is supplemented by the Companys policy to charge-off
all amounts in excess of the collateral value when the loan principal or interest is 120 days or
more days past due.
Generally, the percentage of the allowance for loan and lease losses to non-performing loans will
not remain constant due to the nature of the Companys loan portfolios, which are primarily
collateralized by real estate. The collateral for each non-performing mortgage loan is analyzed to
determine potential loss exposure, and, in conjunction with other factors, this loss exposure
contributes to the overall assessment of the adequacy of the allowance for loan and lease losses.
On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the
allowance for loan and lease losses. In determining the adequacy of the allowance, management
considers such factors as default probabilities, internal risk ratings (based on borrowers
financial stability, external credit ratings, management strength, earnings and operating
environment), probable loss and recovery rates, and the degree of risk inherent in the loan
portfolios. Allocated general reserves are supplemented by a macroeconomic or emerging risk
reserve. This portion of the total allowance for loan and lease losses reflects managements
evaluation of conditions that are not directly reflected in the loss factors used in the
determination of the allowance. The conditions evaluated in connection with the macroeconomic and
emerging risk allowance include national and local economic trends, industry conditions within the
portfolios, recent loan portfolio performance, loan growth, changes in underwriting criteria and
the regulatory and public policy environment.
Loans, or portions of loans, estimated by management to be uncollectible are charged to the
allowance for loan and lease losses. Recoveries on loans previously charged-off are credited to the
allowance. Provisions for loan and lease losses are charged to expenses and credited to the
allowance in amounts estimated by management based upon its evaluation of the known and inherent
risks in the loan portfolio. While management believes that the current allowance for loan and
lease losses is adequate, future additions to the allowance may be necessary. If economic
conditions change substantially from the assumptions used by the Company in determining the
allowance for loan and lease losses further increases in the allowance may be required.
112
The following table summarizes the Companys provisions, charge-offs and recoveries for the ALLL
for the indicated periods and provides allocation of the ALLL to the various loan products.
Table FF Allowance for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
(Dollars in thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
114,768 |
|
|
$ |
5,436 |
|
|
$ |
120,204 |
|
|
$ |
143,603 |
|
|
$ |
3,878 |
|
|
$ |
147,481 |
|
Provision for loans and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage |
|
|
5,405 |
|
|
|
5 |
|
|
|
5,410 |
|
|
|
18,719 |
|
|
|
50 |
|
|
|
18,769 |
|
Lease financing receivables |
|
|
(148 |
) |
|
|
|
|
|
|
(148 |
) |
|
|
64 |
|
|
|
|
|
|
|
64 |
|
Other consumer |
|
|
1,002 |
|
|
|
|
|
|
|
1,002 |
|
|
|
1,580 |
|
|
|
|
|
|
|
1,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
6,259 |
|
|
|
5 |
|
|
|
6,264 |
|
|
|
20,363 |
|
|
|
50 |
|
|
|
20,413 |
|
Commercial real estate |
|
|
4,336 |
|
|
|
36 |
|
|
|
4,372 |
|
|
|
4,754 |
|
|
|
17 |
|
|
|
4,771 |
|
Commercial and industrial |
|
|
(647 |
) |
|
|
1,056 |
|
|
|
409 |
|
|
|
1,669 |
|
|
|
59 |
|
|
|
1,728 |
|
Construction and land |
|
|
2,931 |
|
|
|
(653 |
) |
|
|
2,278 |
|
|
|
17,301 |
|
|
|
404 |
|
|
|
17,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
6,620 |
|
|
|
439 |
|
|
|
7,059 |
|
|
|
23,724 |
|
|
|
480 |
|
|
|
24,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan and lease losses |
|
|
12,879 |
|
|
|
444 |
|
|
|
13,323 |
|
|
|
44,087 |
|
|
|
530 |
|
|
|
44,617 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage |
|
|
(4,271 |
) |
|
|
|
|
|
|
(4,271 |
) |
|
|
(14,497 |
) |
|
|
|
|
|
|
(14,497 |
) |
Lease financing receivables |
|
|
(121 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
(202 |
) |
Other Consumer |
|
|
(1,118 |
) |
|
|
|
|
|
|
(1,118 |
) |
|
|
(1,903 |
) |
|
|
|
|
|
|
(1,903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
(5,510 |
) |
|
|
|
|
|
|
(5,510 |
) |
|
|
(16,602 |
) |
|
|
|
|
|
|
(16,602 |
) |
Commercial real estate |
|
|
(12,755 |
) |
|
|
|
|
|
|
(12,755 |
) |
|
|
(430 |
) |
|
|
|
|
|
|
(430 |
) |
Commercial and industrial |
|
|
(407 |
) |
|
|
|
|
|
|
(407 |
) |
|
|
(978 |
) |
|
|
|
|
|
|
(978 |
) |
Construction and land |
|
|
(21,769 |
) |
|
|
|
|
|
|
(21,769 |
) |
|
|
(38,498 |
) |
|
|
(991 |
) |
|
|
(39,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
(34,931 |
) |
|
|
|
|
|
|
(34,931 |
) |
|
|
(39,906 |
) |
|
|
(991 |
) |
|
|
(40,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(40,441 |
) |
|
|
|
|
|
|
(40,441 |
) |
|
|
(56,508 |
) |
|
|
(991 |
) |
|
|
(57,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing receivables |
|
|
176 |
|
|
|
|
|
|
|
176 |
|
|
|
83 |
|
|
|
|
|
|
|
83 |
|
Other consumer |
|
|
191 |
|
|
|
|
|
|
|
191 |
|
|
|
189 |
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
367 |
|
|
|
|
|
|
|
367 |
|
|
|
272 |
|
|
|
|
|
|
|
272 |
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
43 |
|
|
|
|
|
|
|
43 |
|
Construction and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
43 |
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
386 |
|
|
|
|
|
|
|
386 |
|
|
|
315 |
|
|
|
|
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(40,055 |
) |
|
|
|
|
|
|
(40,055 |
) |
|
|
(56,193 |
) |
|
|
(991 |
) |
|
|
(57,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
87,592 |
|
|
$ |
5,880 |
|
|
$ |
93,472 |
|
|
$ |
131,497 |
|
|
$ |
3,417 |
|
|
$ |
134,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL plus partial charge-offs and discounts to loans receivable (excluding FHA/VA
guaranteed loans and loans on savings deposits) |
|
|
|
|
|
|
|
|
|
|
3.70 |
% |
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
ALLL as a percentage of loans receivable outstanding, at the end of period |
|
|
|
|
|
|
|
|
|
|
1.64 |
% |
|
|
|
|
|
|
|
|
|
|
2.44 |
% |
Provision for loan and lease losses to net charge-offs |
|
|
|
|
|
|
|
|
|
|
33.26 |
% |
|
|
|
|
|
|
|
|
|
|
78.02 |
% |
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
(Dollars in thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
2010 |
|
Net charge-offs to average loans receivable outstanding |
|
|
|
|
|
|
|
|
|
|
0.71 |
% |
|
|
|
|
|
|
|
|
|
|
1.03 |
% |
ALLL to net charge-offs on an annualized basis |
|
|
|
|
|
|
|
|
|
|
58.18 |
% |
|
|
|
|
|
|
|
|
|
|
58.82 |
% |
114
The
following table summarizes Doral Financials provisions, charge-offs and recoveries for
the ALLL for the periods indicated and provides allocation by loan categories.
Table GG Allowance for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month Periods Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
(Dollars in thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
PR |
|
|
US |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
117,821 |
|
|
$ |
5,831 |
|
|
$ |
123,652 |
|
|
$ |
136,878 |
|
|
$ |
3,896 |
|
|
$ |
140,774 |
|
Provision (recovery) for loans and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage |
|
|
6,150 |
|
|
|
15 |
|
|
|
6,165 |
|
|
|
25,312 |
|
|
|
66 |
|
|
|
25,378 |
|
Lease financing receivables |
|
|
(430 |
) |
|
|
|
|
|
|
(430 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
(190 |
) |
Other consumer |
|
|
1,779 |
|
|
|
|
|
|
|
1,779 |
|
|
|
3,467 |
|
|
|
|
|
|
|
3,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
7,499 |
|
|
|
15 |
|
|
|
7,514 |
|
|
|
28,589 |
|
|
|
66 |
|
|
|
28,655 |
|
Commercial real estate |
|
|
(1,419 |
) |
|
|
35 |
|
|
|
(1,384 |
) |
|
|
7,822 |
|
|
|
17 |
|
|
|
7,839 |
|
Commercial and industrial |
|
|
(448 |
) |
|
|
748 |
|
|
|
300 |
|
|
|
1,618 |
|
|
|
36 |
|
|
|
1,654 |
|
Construction and land |
|
|
10,233 |
|
|
|
(749 |
) |
|
|
9,484 |
|
|
|
19,997 |
|
|
|
393 |
|
|
|
20,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
8,366 |
|
|
|
34 |
|
|
|
8,400 |
|
|
|
29,437 |
|
|
|
446 |
|
|
|
29,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (recovery) for loan and lease losses |
|
|
15,865 |
|
|
|
49 |
|
|
|
15,914 |
|
|
|
58,026 |
|
|
|
512 |
|
|
|
58,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage |
|
|
(7,497 |
) |
|
|
|
|
|
|
(7,497 |
) |
|
|
(19,212 |
) |
|
|
|
|
|
|
(19,212 |
) |
Lease financing receivables |
|
|
(231 |
) |
|
|
|
|
|
|
(231 |
) |
|
|
(512 |
) |
|
|
|
|
|
|
(512 |
) |
Other Consumer |
|
|
(2,606 |
) |
|
|
|
|
|
|
(2,606 |
) |
|
|
(4,042 |
) |
|
|
|
|
|
|
(4,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
(10,334 |
) |
|
|
|
|
|
|
(10,334 |
) |
|
|
(23,766 |
) |
|
|
|
|
|
|
(23,766 |
) |
Commercial real estate |
|
|
(12,755 |
) |
|
|
|
|
|
|
(12,755 |
) |
|
|
(686 |
) |
|
|
|
|
|
|
(686 |
) |
Commercial and industrial |
|
|
(426 |
) |
|
|
|
|
|
|
(426 |
) |
|
|
(1,176 |
) |
|
|
|
|
|
|
(1,176 |
) |
Construction and land |
|
|
(23,359 |
) |
|
|
|
|
|
|
(23,359 |
) |
|
|
(38,530 |
) |
|
|
(991 |
) |
|
|
(39,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
(36,540 |
) |
|
|
|
|
|
|
(36,540 |
) |
|
|
(40,392 |
) |
|
|
(991 |
) |
|
|
(41,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(46,874 |
) |
|
|
|
|
|
|
(46,874 |
) |
|
|
(64,158 |
) |
|
|
(991 |
) |
|
|
(65,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing receivables |
|
|
478 |
|
|
|
|
|
|
|
478 |
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
Other consumer |
|
|
283 |
|
|
|
|
|
|
|
283 |
|
|
|
404 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
761 |
|
|
|
|
|
|
|
761 |
|
|
|
513 |
|
|
|
|
|
|
|
513 |
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
50 |
|
Commercial and industrial |
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
66 |
|
|
|
|
|
|
|
66 |
|
Construction and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
238 |
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
780 |
|
|
|
|
|
|
|
780 |
|
|
|
751 |
|
|
|
|
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(46,094 |
) |
|
|
|
|
|
|
(46,094 |
) |
|
|
(63,407 |
) |
|
|
(991 |
) |
|
|
(64,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
87,592 |
|
|
$ |
5,880 |
|
|
$ |
93,472 |
|
|
$ |
131,497 |
|
|
$ |
3,417 |
|
|
$ |
134,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL plus partial charge-offs and discounts to loans
receivable (excluding FHA/VA guaranteed loans and
loans on savings deposits) |
|
|
|
|
|
|
|
|
|
|
3.70 |
% |
|
|
|
|
|
|
|
|
|
|
2.74 |
% |
ALLL as a percentage of loans receivable outstanding,
at the end of period |
|
|
|
|
|
|
|
|
|
|
1.64 |
% |
|
|
|
|
|
|
|
|
|
|
2.44 |
% |
Provision for loan losses to net charge-offs |
|
|
|
|
|
|
|
|
|
|
34.53 |
% |
|
|
|
|
|
|
|
|
|
|
90.90 |
% |
Net charge-offs to average loans receivable
outstanding |
|
|
|
|
|
|
|
|
|
|
0.83 |
% |
|
|
|
|
|
|
|
|
|
|
1.16 |
% |
ALLL to net charge-offs on an annualized basis |
|
|
|
|
|
|
|
|
|
|
100.56 |
% |
|
|
|
|
|
|
|
|
|
|
103.89 |
% |
115
While the ALLL is a general reserve established to reflect losses estimated to have been
incurred across the entire held for investment loan portfolio, the following table sets forth
information concerning the allocation of Doral Financials allowance for loans and lease losses by
category and the percentage of loans in each category to total loans as of the dates indicated:
Table HH Allocation of Allowance for Loans and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(Dollars in thousands) |
|
PR |
|
|
US |
|
|
Total |
|
|
Percentage |
|
|
PR |
|
|
US |
|
|
Total |
|
|
Percentage |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
54,903 |
|
|
$ |
252 |
|
|
$ |
55,155 |
|
|
|
59 |
% |
|
$ |
56,250 |
|
|
$ |
237 |
|
|
$ |
56,487 |
|
|
|
46 |
% |
Lease financing receivable |
|
|
335 |
|
|
|
|
|
|
|
335 |
|
|
|
|
% |
|
|
518 |
|
|
|
|
|
|
|
518 |
|
|
|
|
% |
Other consumer |
|
|
5,212 |
|
|
|
|
|
|
|
5,212 |
|
|
|
6 |
% |
|
|
5,756 |
|
|
|
|
|
|
|
5,756 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
60,450 |
|
|
|
252 |
|
|
|
60,702 |
|
|
|
65 |
% |
|
|
62,524 |
|
|
|
237 |
|
|
|
62,761 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
15,388 |
|
|
|
185 |
|
|
|
15,573 |
|
|
|
17 |
% |
|
|
29,562 |
|
|
|
150 |
|
|
|
29,712 |
|
|
|
24 |
% |
Commercial and industrial |
|
|
2,119 |
|
|
|
3,927 |
|
|
|
6,046 |
|
|
|
6 |
% |
|
|
2,974 |
|
|
|
3,179 |
|
|
|
6,153 |
|
|
|
5 |
% |
Construction and land |
|
|
9,635 |
|
|
|
1,516 |
|
|
|
11,151 |
|
|
|
12 |
% |
|
|
22,761 |
|
|
|
2,265 |
|
|
|
25,026 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
27,142 |
|
|
|
5,628 |
|
|
|
32,770 |
|
|
|
35 |
% |
|
|
55,297 |
|
|
|
5,594 |
|
|
|
60,891 |
|
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,592 |
|
|
$ |
5,880 |
|
|
$ |
93,472 |
|
|
|
100 |
% |
|
$ |
117,821 |
|
|
$ |
5,831 |
|
|
$ |
123,652 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, the Companys allowance for loan and lease losses was $93.5 million, a
decrease of $30.2 million from $123.7 million as of December 31, 2010. This reduction was driven by
a decrease of $14.1 million and $13.9 million in the ALLL related to commercial real estate loans
and the construction and land portfolio, respectively, primarily as a result of charge-offs. The
second quarter provision for loan losses of $13.3 million declined $31.3 million compared to the
second quarter of 2010. The second quarter 2011 provision resulted from (i) new market information
received increasing estimated losses on loans evaluated individually for impairment in the second
quarter, and (ii) an increase in past due residential mortgage loans. The June 2010 provision
included a $12.6 million charge to reduce certain construction loans to lower of cost or market
when transferred to loans held for sale and an $8.0 million charge due to increased severities on
other real estate owned properties resulting from managements strategic decision to accelerate
OREO dispositions, in addition to higher provisions driven by higher delinquencies in 2010 compared
to 2011. The provision for loan and lease losses for the six month period ended June 30, 2011
totaled $15.9 million compared to $58.5 million for the same period in 2010. The decrease of $42.6
million in the provision was mainly related to the previously mentioned charges of $12.6 million
for loans reclassified to held for sale and $8.0 million for increased severities on OREO as well
as higher delinquencies which drove higher provisions in 2010 compared to 2011.
Net charge-offs for the second quarter of 2011 decreased by $17.1 million when compared to June 30,
2011. Construction and land loans and residential mortgage loans reflected a decrease in
charge-offs during the second quarter of 2011 compared to 2010 of approximately $17.2 million and $10.2 million,
respectively. This decrease was partially offset by an increase of $12.3 million in charge-offs
related to the commercial real estate portfolio. The increase in charge-off is the result of the
Companys adoption of a new practice of assessing the collectability of long term delinquent
collateral dependent loans described earlier in the document.
Net charge-offs for the six months ended June 30, 2011 decreased $18.3 million when compared to the
same period during 2010. The construction and land portfolios reflect a decrease of $16.2 million,
while the residential mortgage and consumer portfolios reflect a decrease of $11.7 million and $1.4
million, respectively. The commercial real estate portfolio reflects an increase of approximately
$12.0 million during the period ended June 30, 2011. As mentioned previously, this increase is
mostly related to the adoption of a new practice of access the collectability of long term
delinquent collateral dependent loans. The allowance for loan and lease losses coverage ratios as
of June 30, 2011 and December 31, 2010 (including and excluding the effect of partial charge-offs
and credit related discounts) was as follows:
116
Table II Allowance for Loan and Lease Losses Coverage Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
|
|
ALLL plus partial charge- |
|
|
|
|
|
|
|
|
|
ALLL plus partial charge- |
|
|
|
|
offs and discount as a % of: (1) |
|
ALLL as a % of: (2) |
|
offs and discount as a % of: (1) |
|
ALLL as a % of: (2) |
|
|
Loans (3) |
|
NPLs |
|
Loans (3) |
|
NPLs |
|
Loans (3) |
|
NPLs |
|
Loans (3) |
|
NPLs |
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
2.43 |
% |
|
|
29.70 |
% |
|
|
1.56 |
% |
|
|
19.82 |
% |
|
|
2.46 |
% |
|
|
31.77 |
% |
|
|
1.59 |
% |
|
|
20.29 |
% |
Lease financing receivable |
|
|
12.09 |
|
|
|
167.84 |
|
|
|
12.09 |
|
|
|
167.84 |
|
|
|
10.78 |
|
|
|
124.82 |
|
|
|
10.78 |
|
|
|
124.82 |
|
Consumer |
|
|
11.91 |
% |
|
|
1,053.51 |
% |
|
|
11.80 |
% |
|
|
1,042.60 |
% |
|
|
11.22 |
% |
|
|
1,431.68 |
% |
|
|
11.17 |
% |
|
|
1,424.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
2.55 |
% |
|
|
31.64 |
% |
|
|
1.70 |
% |
|
|
21.76 |
% |
|
|
2.60 |
% |
|
|
33.94 |
% |
|
|
1.74 |
% |
|
|
22.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
5.91 |
% |
|
|
24.45 |
% |
|
|
2.34 |
% |
|
|
9.32 |
% |
|
|
7.17 |
% |
|
|
26.33 |
% |
|
|
4.31 |
% |
|
|
15.37 |
% |
Commercial and industrial |
|
|
0.70 |
% |
|
|
230.54 |
% |
|
|
0.66 |
% |
|
|
218.86 |
% |
|
|
0.97 |
% |
|
|
243.97 |
% |
|
|
0.97 |
% |
|
|
243.97 |
% |
Construction and land |
|
|
15.66 |
% |
|
|
64.46 |
% |
|
|
2.86 |
% |
|
|
10.22 |
% |
|
|
12.79 |
% |
|
|
42.00 |
% |
|
|
5.46 |
% |
|
|
16.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
5.73 |
% |
|
|
42.14 |
% |
|
|
1.66 |
% |
|
|
11.75 |
% |
|
|
6.55 |
% |
|
|
34.68 |
% |
|
|
3.42 |
% |
|
|
17.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3.70 |
% |
|
|
36.89 |
% |
|
|
1.64 |
% |
|
|
16.75 |
% |
|
|
3.92 |
% |
|
|
33.83 |
% |
|
|
2.29 |
% |
|
|
19.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans and NPL amounts are increased by the amount of partial charge-offs and
discounts. |
|
(2) |
|
Loans and NPL amounts are not increased by the amount of partial charge-offs and
discounts. |
|
(3) |
|
Excludes FHA/VA guaranteed loans and loans on saving deposits. |
Doral discontinued new construction lending in Puerto Rico in 2007, new commercial real estate
and commercial and industrial lending in Puerto Rico in 2008, and significantly tightened its
residential underwriting standards in 2009. Dorals seasoned vintages, where problems have been
identified and addressed in previous periods, currently require smaller additional provisions.
Considering the effect of the partial charge-offs, the Companys coverage ratio was 3.70% as of
June 30, 2011 and 3.92% as of December 31, 2010. The 22 basis point decline in the allowance to
loans coverage ratio, considering partial charge-offs, was largely due to the increase in the loan
portfolio and the charge-offs. The allowance to non-performing loan coverage ratio increased 306
basis points due to lower non-performing loans and the second quarter provision.
The allowance for loan and lease losses represented 1.64% of period-end loans receivable at June
30, 2011, a decrease of 80 basis points compared with 2.44% at December 31, 2010. The allowance for
loan and lease losses to non-performing loans (excluding non-performing loans held for sale) was
16.75%, a decrease of 307 basis points compared to 19.82% for December 31, 2010. These ratios do
not consider partial charge-offs, and their decrease results from the high level of partial
charge-offs recorded in the second quarter.
The following table summarizes the Companys recorded investment in impaired loans and its related
allowance:
Table JJ Impaired loans and related allowance
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2011 |
|
|
December
31, 2010 (1) |
|
Impaired loans with allowance |
|
$ |
665,319 |
|
|
$ |
773,106 |
|
Impaired loans without allowance |
|
|
545,065 |
|
|
|
486,550 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
1,210,384 |
|
|
$ |
1,259,656 |
|
|
|
|
|
|
|
|
Related allowance |
|
$ |
39,651 |
|
|
$ |
68,693 |
|
(1)
Includes $65.7 million of impaired loans not previously reported as TDRs.
Historically, Doral reduced the reported balance of collateral dependent commercial,
construction and land loans (a loan is collateral dependent when the loan collateral is considered
the likely source of repayment of a delinquent loan) by a charge to the allowance for loan and
lease losses upon receipt of a current market appraised value. As a result of significant delays in
receiving new market value appraisals on Puerto Rico property, Doral has developed a methodology to
estimate market values for all commercial real estate, construction and land properties, based upon
the changes in market values in new appraisals received. Based on this new practice, during the
second quarter of 2011, the Company recorded a charge-off on the difference between the loan
balance before the charge-off and the estimated fair value of the property collateralizing the
loan. Pursuant to this provision, total charge-offs for the second quarter of 2011 totaled $30.1
million.
117
Counterparty Risk
The Company has exposure to many different counterparties, and it routinely executes transactions
with counterparties in the financial services industry, including brokers and dealers, commercial
banks, and other institutional clients. Loans, derivatives investments, repurchase agreements,
other borrowings, and receivables, among others, expose the Company to counterparty risk. Many of
these transactions expose the Company to credit risk in the event of default of its counterparty or
client. In addition, the Companys credit risk may be impacted when the collateral held by it
cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan
or derivative exposure due to the Company. There can be no assurance that any such losses would not
materially and adversely affect the Companys results of operations.
The Company has procedures in place to mitigate the impact of default among its counterparties. The
Company requests collateral for most credit exposures with other financial institutions and
monitors these on a regular basis. Nevertheless, market volatility could impact the valuation of
collateral held by the Company and result in losses.
Operational Risk
Operational risk includes the potential for financial losses resulting from failed or inadequate
controls. Operational risk is inherent in every aspect of business operations, and can result from
a range of factors including human judgment, process or system failures, or business interruptions.
Operational risk is present in all of Doral Financials business processes, including financial
reporting. The Company has adopted a policy governing the requirements for operational risk
management activities. This policy defines the roles and responsibilities for identifying key
risks, key risks indicators, estimation of probabilities and magnitudes of potential losses and
monitoring trends.
Overview of Operational Risk Management
Doral Financial has a corporate-wide Chief Risk Officer, who is responsible for implementing the
process of managing the risks faced by the Company. The Chief Risk Officer is responsible for
coordinating risk identification and monitoring throughout Doral Financial with the Companys
Internal Audit group. In addition, the Internal Audit function provides support to facilitate
compliance with Doral Financials system of policies and controls and to ensure that adequate
attention is given to correct issues identified.
Internal Control Over Financial Reporting
For a detailed discussion of the Managements Report on Internal Control Over Financial Reporting
as of December 31, 2010, please refer to Part II, Item 9A. Controls and Procedures, of the
Companys 2010 Annual Report on Form 10-K.
Liquidity Risk
For a discussion of the risks associated with Doral Financials ongoing need for capital to finance
its lending, servicing and investing activities, please refer to Liquidity and Capital Resources
above.
General Business, Economic and Political Conditions; Puerto Rico Economy and Fiscal Condition
The Companys business and earnings are sensitive to general business and economic conditions in
Puerto Rico and the United States. Significant business and economic conditions include short-term
and long-term interest rates, inflation and the strength of the Puerto Rico and U.S. economies and
housing markets. If any of these conditions deteriorate, the Companys business and earnings could
be adversely affected. For example, business and economic conditions that negatively impact
household income could decrease the demand for residential mortgage loans and increase the number
of customers who become delinquent or default on their loans; or, a dramatically rising interest
rate environment could decrease the demand for loans and negatively affect the value of the
Companys investments and loans.
118
Inflation also generally results in increases in general and administrative expenses. Interest
rates normally increase during periods of high inflation and decrease during periods of low
inflation. Please refer to Risk Management above for a discussion of the effects of changes of
interest rates on Doral Financials operations.
Given that almost all of our business is in Puerto Rico and the United States and given the degree
of interrelation between Puerto Ricos economy and that of the United States, we are particularly
exposed to downturns in the United States economy. Dramatic declines in the United States housing
market over the past few years, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the performance of mortgage loans and
resulted in significant write-downs of asset values by financial institutions.
Doral Financials business activities and credit exposure are concentrated in Puerto Rico.
Consequently, its financial condition and results of operations are highly dependent on economic
conditions in Puerto Rico.
The economy of Puerto Rico is closely linked to the United States economy, as most of the external
factors that affect the Puerto Rico economy (other than the price of oil) are determined by the
policies of, and economic conditions prevailing in, the United States. These external factors
include exports, direct investment, the amount of federal transfer payments, the level of interest
rates, the rate of inflation, and tourist expenditures. During the fiscal year ended June 30, 2010,
approximately 68.1% of Puerto Ricos exports went to the U.S. mainland, which was also the source
of approximately 53.3% of Puerto Ricos imports. In the past, the economy of Puerto Rico has
generally followed economic trends in the overall United States economy. However, in recent years,
economic growth in Puerto Rico has lagged behind growth in the United States.
The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing
and services. The manufacturing sector has undergone fundamental changes over the years as a result
of an increased emphasis on higher-wage, high-technology industries, such as pharmaceuticals,
biotechnology, computers, microprocessors, professional and scientific instruments, and certain
high-technology machinery and equipment. The services sector, including finance, insurance, real
estate, wholesale and retail trade, and tourism, also plays a major role in the economy. It ranks
second to manufacturing in contribution to Puerto Ricos gross domestic product and leads all
sectors in providing employment.
Puerto Ricos economy is currently in a recession that began in the fourth quarter of the fiscal
year that ended June 30, 2006, a fiscal year in which Puerto Rico gross national grew by only 0.5%.
Puerto Ricos real gross national product decreased by 1.2%, 2.9% and 4.0%, respectively, for
fiscal years 2007, 2008 and 2009. According to the Puerto Rico Planning Boards latest
projections, Puerto Rico real gross national product was projected to have contracted 3.8% and 1.0%
during fiscal years 2010 and 2011, respectively. Puerto Ricos real gross national product for
fiscal year 2012, however, is projected to grow by 0.7%.
The number of persons employed in Puerto Rico during fiscal year 2010 averaged 1,102,700, a
decrease of 5.6% compared to the previous fiscal year. During the first nine months of fiscal year
2011, total employment averaged 1,079,700, a decline of 2.6% with the same period of the previous
fiscal year, and the unemployment rate averaged 16.0%.
Future growth of the Puerto Rico economy will depend on several factors including the condition of
the United States economy, the relative stability of the price of oil imports, the exchange value
of the United States dollar, the level of interest rates, the effectiveness of the recently
approved changes to local tax incentive legislation, and the continuing economic uncertainty
generated by the Puerto Rico governments fiscal condition described below.
Since 2000, the Government of Puerto Rico has experienced a structural imbalance between recurring
government revenues and total expenditures. The structural imbalance was exacerbated during fiscal
years 2008 and 2009, with recurring government expenditures significantly exceeding recurring
government revenues. Prior to fiscal year 2009, the Puerto Rico government bridged the deficit
resulting from the structural imbalance through the use of non-recurring measures, such as
borrowing from the Government Development Bank for Puerto Rico or in the bond market, postponing
the payment of various government expenses, such as payments to suppliers and utilities providers,
and other one time measures such as the use of derivatives and borrowings collateralized with
government assets such as real estate. Since March 2009, the government has taken multiple steps to
address and resolve the structural imbalance.
On August 8, 2011 Moodys Investors Service downgraded the long-term debt rating of
the Commonwealth of Puerto Rico from A3 to Baal. The action by Moodys was
primarily due to the financial situation of the three Puerto Rico governments pension
systems. As of June 30, 2010, the date of the latest actuarial valuations of the retirement systems, the
unfunded actuarial accrued liability (including basic and system administered benefits) for the Employees Retirement System, the
Teachers Retirement System and the Judiciary Retirement System was
$17.8 billion, $7.1 billion and $283 million, respectively, and
the funded ratios were 8.5%, 23.9% and 16.4%, respectively.
For additional information relating to the fiscal situation and challenges of the Government of
Puerto Rico and various initiatives it has undertaken during the last two fiscal years, refer to
the sections titled Fiscal Condition, Fiscal Stabilization Plan, Government Reorganization
Plan, Unfunded Pension Benefit Obligations and Funding Shortfalls of the Retirement System,
Economic Reconstruction Plan, and Economic Development Plan under Business-The Commonwealth
in item 1 of the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
119
The Company cannot predict at this time the impact that the current fiscal situation of the
Commonwealth of Puerto Rico and the various legislative and other measures adopted by the Puerto
Rico government in response to such fiscal situation will have on the Puerto Rico economy and on
Doral Financials financial condition and results of operations.
The Company operates in a highly competitive industry that could become even more competitive as a
result of economic, legislative, regulatory and technological changes. The Company faces
competition in such areas as mortgage and banking product offerings, rates and fees, and customer
service. In addition, technological advances and increased e-commerce activities have, generally,
increased accessibility to products and services for customers which has intensified competition
among banking and non-banking companies in the offering of financial products and services, with or
without the need for a physical presence.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Company is exposed, please refer to
Managements Discussion and Analysis of Financial Condition and Results of Operations Risk
Management.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Control and Procedures
Doral Financials management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the Exchange Act) as of June 30, 2011. Disclosure controls and procedures are defined
under SEC rules as controls and other procedures that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms. Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required disclosure. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives. Based on this evaluation, Doral
Financials Chief Executive Officer and its Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were effective as of June 30, 2011.
Changes in Internal Control Over Financial Reporting
There have been no changes to the Companys internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
120
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information on these proceedings, refer to Note 26 to the unaudited interim consolidated
financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form
10-Q.
Legal Matters
On August 24, 2005, the U.S. Attorneys Office for the Southern District of New York served Doral
Financial with a grand jury subpoena seeking the production of certain documents relating to issues
arising from the restatement, including financial statements and corporate, auditing and accounting
records prepared during the period from January 1, 2000 to the date of the subpoena. Doral
Financial is cooperating with the U.S. Attorneys Office in this matter. Doral Financial cannot
predict the outcome of this matter and is unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact to Doral Financial of this matter.
On August 13, 2009, Mario S. Levis, former Treasurer of Doral, filed a complaint against the
Company in the Supreme Court of the State of New York. The complaint alleges that the Company
breached a contract with the plaintiff and the Companys by-laws by failing to advance payment of
certain legal fees and expenses that Mr. Levis has incurred in connection with a criminal
indictment filed against him in the U.S. District Court for the Southern District of New York.
Further, the complaint claims that Doral fraudulently induced the plaintiff to enter into
agreements concerning the settlement of a civil litigation arising from the restatement of the
Companys financial statements for fiscal years 2000 through 2004. The complaint seeks declaratory
relief, damages, costs and expenses. On December 16, 2009, the parties entered into a settlement
agreement. On December 17, 2009, Mr. Levis motion for a preliminary injunction was denied as moot,
and all further proceedings were stayed.
Banking Regulatory Matters
On March 16, 2006, Doral Financial entered into a consent cease and desist order with the Federal
Reserve. The mutually agreed upon order required Doral Financial to conduct reviews of its mortgage
portfolio, and to submit plans regarding the maintenance of capital adequacy and liquidity. The
consent order contains restrictions on Doral Financial from obtaining extensions of credit from, or
entering into certain asset purchase and sale transactions with its banking subsidiaries, without
the prior approval of the Federal Reserve. The consent order restricts Doral Financial from
receiving dividends from the banking subsidiaries without the approval of the respective primary
banking regulatory agency. Doral Financial is also required to request permission from the Federal
Reserve for the payment of dividends on its common stock and preferred stock not less than 30 days
prior to a proposed dividend declaration date and requires Doral Financial and Doral Bank PR to
submit plans regarding the maintenance of minimum levels of capital and liquidity. Doral Financial
has complied with these requirements and no fines or civil money penalties were assessed against
the Company under the order.
As a result of an examination conducted during the third quarter of 2008, on July 8, 2009, Doral
Bank PR consented with the Federal Deposit Insurance Corporation (FDIC) and paid civil monetary
penalties of $38,030 related to deficiencies in compliance with the National Flood Insurance Act as
a result of flood insurance coverage, failure to maintain continuous flood insurance protection and
failure to ensure that borrowers obtain flood insurance in a timely manner.
On February 19, 2008, Doral Bank PR entered into a consent order with the FDIC relating to failure
to comply with certain requirements of the Bank Secrecy Act (BSA). The regulatory findings that
resulted in the order were based on an examination conducted for the period ended December 31,
2006, and were related to findings that had initially occurred in 2005 prior to the Companys
change in management and the Recapitalization. The order replaced the Memorandum of Understanding
with the FDIC and the Office of the Commissioner dated August 23, 2006. Doral Bank PR was not
required to pay any civil monetary penalties in connection with this order. The order required
Doral Bank PR to correct certain violations of law, within the timeframes set forth in the order
(generally 120 days) including certain violations regarding the BSA, failure to maintain an
adequate BSA/Anti-Money Laundering Compliance Program (BSA/AML Compliance Program) and failure to
operate with an effective compliance program to ensure compliance with the regulations promulgated
by the United States Department of Treasurys Office of Foreign Asset Control (OFAC). The order
further required Doral Bank PR to, among other things, amend its policies, procedures and processes
and training programs to ensure full compliance with the BSA and OFAC; conduct an expanded BSA/AML
risk assessment of its operations, enhance its due diligence and account monitoring procedures,
review its BSA/AML staffing and resource needs, amend its policies and procedures for internal and
external audits to include periodic reviews for BSA/AML compliance, OFAC compliance and perform
annual independent testing programs for BSA/AML and OFAC requirements. The order also required
Doral Bank PR to engage an independent consultant to review account and transaction activity from
April 1, 2006 through March 31, 2007 to determine compliance with suspicious activity reporting
requirements (the Look Back Review). On September 15, 2008, the FDIC terminated this consent
order. As the Look Back
121
Review was in process, Doral Bank PR and the FDIC agreed to a Memorandum of
Understanding that covered the remaining
portion of the Look Back Review. On June 30, 2009, the FDIC terminated this Memorandum of
Understanding because the Look Back Review had been completed.
Doral Financial and Doral Bank PR have undertaken specific corrective actions to comply with the
requirements of the terminated enforcement actions and the single remaining enforcement action, but
cannot give assurances that such actions are sufficient to prevent further enforcement actions by
the banking regulatory agencies.
ITEM 1A. RISK FACTORS
Readers should carefully consider, in connection with other information disclosed in this Quarterly
Report on Form 10-Q, the risk factors set forth in Item 1A-Risk Factors of the Companys 2010
Annual Report on Form 10-K as updated by the information set forth below and other filings made by
the Company with the Securities and Exchange Commission. These risk factors and other presently
unforeseen risk factors could cause our actual results to differ materially from those stated in
any forward-looking statements included in this Quarterly Report on Form 10-Q or included in our
previous filings with the Securities and Exchange Commission. In addition, these risk factors and
other presently unforeseen risk factors could have a material adverse effect on our business,
financial condition, or results of operations. Please also refer to the section titled Forward
Looking Statements in this Quarterly Report on Form 10-Q.
Recent and/or future U.S. credit downgrades or changes in outlook by major credit rating agencies
may have an adverse effect on financial markets, including financial institutions and the financial
industry.
On August 5, 2011, Standard and Poors downgraded the United States long-term debt rating from its
AAA rating to AA+. On August 8, 2011, Standard and Poors downgraded from AAA to AA+ the credit
ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S.
government agencies linked to long-term United States debt. It is difficult to predict the effect
of these actions, or any future downgrades or changes in outlook by Standard & Poors or either of
the other two major credit rating agencies. However, these events could impact the trading market
for U.S. government securities, including agency securities, and the securities markets more
broadly, and consequently could impact the value and liquidity of financial assets, including
assets in our investment portfolio. These actions could also create broader financial turmoil and
uncertainty, which may negatively affect the global banking system and limit the availability of
funding, including borrowing under repurchase agreements, at reasonable terms. In turn, this could
have a material adverse effect on our liquidity, financial condition and results of operations.
The Company has been and could continue to be negatively affected by adverse economic conditions.
The United States and other countries recently faced a severe economic crisis, including a major
recession. These adverse economic conditions have negatively affected, and are likely to continue
to negatively affect for some time, the Companys assets, including its loans and securities
portfolios, capital levels, results of operations and financial condition. In response to the
economic crisis, the United States and other governments established a variety of programs and
policies designed to mitigate the effects of the crisis. These programs and policies appear to
have stabilized the severe financial crisis that occurred in the second half of 2008, but the extent
to which these programs and policies will assist in an economic recovery or may lead to adverse
consequences, whether anticipated or unanticipated, is still unclear. If these programs and
policies are ineffective in bringing about an economic recovery or result in substantial adverse
developments, the economic conditions may again become more severe, or adverse economic conditions
may continue for a substantial period of time. In addition, economic uncertainty that may result
from the recent downgrading of United States long-term debt, and fiscal imbalances in federal,
state and local municipal finances combined with the political difficulties in resolving these
imbalances, may directly or indirectly adversely impact economic conditions faced by the Company
and its customers. Any increase in the severity or duration of adverse economic conditions,
including a double-dip recession in the United States or a delay in recovery in Puerto Rico, would
adversely affect the Companys financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously disclosed, our board of directors announced on March 20, 2009 that it had suspended
the declaration and payment of all dividends on our 7% Noncumulative Monthly Income Preferred
Stock, Series A, 8.35% Noncumulative Monthly Income Preferred Stock, Series B and 7.25%
Noncumulative Monthly Income Preferred Stock, Series C (collectively, the Noncumulative
122
Preferred Stock) and 4.75% Perpetual Cumulative Convertible
Preferred Stock (the Convertible Preferred
Stock). The
suspension of dividends for our Noncumulative Preferred Stock was effective and commenced with the
dividends for the month of April 2009. The suspension of dividends for our Convertible Preferred
Stock was effective and commenced with the dividends for the quarter commencing in April 2009.
Accrued dividends in arrearage with respect to our Convertible Preferred Stock, through June 30,
2011, were approximately $22.1 million.
Because we have failed to pay dividends in full on all outstanding series of our Noncumulative
Preferred Stock for eighteen consecutive monthly dividend periods and on our Convertible Preferred
Stock for consecutive dividend periods containing in the aggregate a number of days equivalent to
six fiscal quarters, the holders of our Noncumulative Preferred Stock and the holders of our
Convertible Preferred Stock, all acting together as a single class, have the right to appoint or
elect two additional members of our board of directors in accordance with the terms of the
respective certificates of designation with respect to such preferred stock. A special meeting of
holders of shares of Noncumulative Preferred Stock and Cumulative Preferred Stock of Doral
Financial was scheduled to be held on August 3, 2011 for the purpose of electing two directors of
the Companys Board of Directors by such holders of shares of preferred stock of Doral Financial.
Due to the lack of a quorum, the special meeting was not able to be held.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
On August 10, 2011, Mr. Robert E. Wahlman (the Executive)
and the Company amended certain terms of the Employment Agreement executed by and between the Company
and the Executive on March 16, 2009, which included the
Executives principal work location and cost of housing. See
Exhibit 10.22 to this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS.
The exhibits to this Quarterly Report on Form 10-Q are listed in the exhibit index below.
Doral Financial has not filed as exhibits certain instruments defining the rights of holders of
debt of the Company not exceeding 10% of the total assets of Doral Financial and its consolidated
subsidiaries. Doral Financial will furnish copies of any such instruments to the Securities and
Exchange Commission upon request.
123
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Certificate of Incorporation of Doral Financial, as currently in effect. (Incorporated herein by reference
to exhibit number 3.1(j) to Doral Financials Annual Report on Form 10-K for the year ended December 31,
2007 filed with the Commission on March 19, 2008). |
|
|
|
3.2
|
|
Bylaws of Doral Financial, as amended on August 2, 2007. (Incorporated herein by reference to exhibit
number 3.1 of Doral Financials Current Report on Form 8-K filed with the Commission on August 6, 2007). |
|
|
|
3.3
|
|
Certificate of Amendment of the Certificate of Incorporation of Doral Financial dated March 12, 2010
(Incorporated herein by reference to exhibit number 3.1 of Doral Financials Current Report on Form 8-K
filed with the Commission on March 16, 2010). |
|
|
|
3.4
|
|
Certificate of Designations of Mandatorily Convertible Non-Cumulative Non-Voting Preferred Stock dated
April 20, 2010 (Incorporated herein by reference to exhibit number 3.1 of Doral Financials Current Report
on Form 8-K filed with the Commission on April 26, 2010). |
|
|
|
4.1
|
|
Common Stock Certificate (Incorporated herein by reference to exhibit number 4.1 to Doral Financials
Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19,
2008). |
|
|
|
4.2
|
|
Loan and Guaranty Agreement among Puerto Rico Industrial, Tourist, Educational, Medical and Environmental
Control Facilities Financing Authority (AFICA), Doral Properties, Inc. and Doral Financial.
(Incorporated herein by reference to exhibit number 4.1 of Doral Financials Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 filed with the Commission on November 15, 1999). |
|
|
|
4.3
|
|
Trust Agreement between AFICA and Citibank, N.A. (Incorporated herein by reference to exhibit number 4.2
of Doral Financials Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 filed with the
Commission on November 15, 1999). |
|
|
|
4.4
|
|
Form of Serial and Term Bond (included in Exhibit 4.3 hereof). |
|
|
|
4.5
|
|
Deed of Constitution of First Mortgage over Doral Financial Plaza. (Incorporated herein by reference to
exhibit number 4.4 of Doral Financials Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
filed with the Commission on November 15, 1999). |
|
|
|
4.6
|
|
Mortgage Note secured by First Mortgage referred to in Exhibit 4.5 hereto (included in Exhibit 4.5 hereof). |
|
|
|
4.7
|
|
Pledge and Security Agreement. (Incorporated herein by reference to exhibit number 4.6 of Doral
Financials Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 filed with the Commission
on November 15, 1999). |
|
|
|
4.8
|
|
Indenture, dated May 14, 1999, between Doral Financial and U.S. Bank National Association, as trustee,
pertaining to senior debt securities. (Incorporated herein by reference to exhibit number 4.1 of Doral
Financials Current Report on Form 8-K filed with the Commission on May 21, 1999). |
|
|
|
4.9
|
|
Indenture, dated May 14, 1999, between Doral Financial and Bankers Trust Company, as trustee, pertaining
to subordinated debt securities. (Incorporated herein by reference to exhibit number 4.3 of Doral
Financials Current Report on Form 8-K filed with the Commission on May 21, 1999). |
|
|
|
4.10
|
|
Form of Stock Certificate for 7% Noncumulative Monthly Income Preferred Stock, Series A. (Incorporated
herein by reference to exhibit number 4(A) of Doral Financials Registration Statement on Form S-3 filed
with the Commission on October 30, 1998). |
124
|
|
|
Exhibit |
|
|
Number |
|
Description |
4.11
|
|
Form of Stock Certificate for 8.35% Noncumulative Monthly Income Preferred Stock, Series B. (Incorporated
herein by reference to exhibit number 4.1 of Doral Financials Registration Statement on Form 8-A filed
with the Commission on August 30, 2000). |
|
|
|
4.12
|
|
First Supplemental Indenture, dated as of March 30, 2001, between Doral Financial and Deutsche Bank Trust
Company Americas (formerly known as Bankers Trust Company), as trustee. (Incorporated herein by reference
to exhibit number 4.9 to Doral Financials Current Report on Form 8-K filed with the Commission on April
2, 2001). |
|
|
|
4.13
|
|
Form of Stock Certificate for 7.25% Noncumulative Monthly Income Preferred Stock, Series C. (Incorporated
herein by reference to exhibit number 4.1 of Doral Financials Registration Statement on Form 8-A filed
with the Commission on May 30, 2002). |
|
|
|
4.14
|
|
Form of Stock Certificate for 4.75% Perpetual Cumulative Convertible Preferred Stock. (Incorporated herein
by reference to exhibit number 4 to Doral Financials Current Report on Form 10-K filed with the
Commission on March 31, 2003). |
|
|
|
4.15
|
|
Form of Stock Certificate for Mandatorily Convertible Non-Cumulative Non-Voting Preferred Stock
(Incorporated herein by reference to exhibit number 4.1 of Doral Financials Current Report on Form 8-K
filed with the Commission on April 26, 2010)(included in Exhibit 3.4 hereto). |
|
|
|
10.1
|
|
Order to Cease and Desist issued by the Board of Governors of the Federal Reserve System on March 16,
2006. (Incorporated herein by reference to exhibit number 99.2 of Doral Financials Current Report of Form
8-K filed with the Commission on March 17, 2006). |
|
|
|
10.2
|
|
Stipulation and Agreement of Partial Settlement, dated as of April 27, 2007. (Incorporated herein by
reference to same exhibit number of Doral Financials Annual Report on Form 10-K for the year ended
December 31, 2006 filed with the Commission on April 30, 2007). |
|
|
|
10.3
|
|
Order to Cease and Desist issued by the Federal Deposit Insurance Corporation, dated February 19, 2008.
(Incorporated herein by reference to exhibit number 99-2 of Doral Financials Current Report of Form 8-K
filed with the Commission on February 21, 2008). |
|
|
|
10.4
|
|
Purchase Agreement, dated September 23, 2003, between Doral Financial Corporation and Wachovia Securities
LLC, as Representative of the Initial Purchasers of Doral Financials 4.75% Perpetual Cumulative
Convertible Preferred Stock named therein. (Incorporated herein by reference to exhibit number 1 to Doral
Financials Current Report on Form 8-K filed with the Commission on March 31, 2003). |
|
|
|
10.5
|
|
Employment Agreement, dated as of May 23, 2006, between Doral Financial Corporation and Glen Wakeman.
(Incorporated herein by reference to exhibit number 10.1 to Doral Financials Current Report on Form 8-K
filed with the Commission on May 30, 2006). |
|
|
|
10.6
|
|
Employment Agreement, dated as of August 14, 2006, between Doral Financial Corporation and Lesbia Blanco.
(Incorporated herein by reference to exhibit number 10.1 to Doral Financials Quarterly Report on Form
10-Q for the quarter ended March 31, 2006 filed with the Commission on December 29, 2006). |
|
|
|
10.7
|
|
Employment Agreement, dated as of October 2, 2006, between Doral Financial Corporation and Enrique R.
Ubarri, Esq. (Incorporated herein by reference to exhibit number 10.7 to Doral Financials Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 filed with the Commission on December 29, 2006). |
|
|
|
10.8
|
|
Employment Agreement, dated as of June 25, 2007, between Doral Financial Corporation and Paul Makowski
(Incorporated herein by reference to exhibit number 10.11 to Doral Financials Annual Report on Form 10-K
for the year ended December 31, 2007 filed with the Commission on March 19, 2008). |
125
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.9
|
|
Employment Agreement, dated as of June 1, 2007, between Doral Financial Corporation and Christopher
Poulton (Incorporated herein by reference to exhibit number 10.10 to Doral Financials Annual Report on
Form 10-K for the year ended December 31, 2007 filed with the Commission on March 19, 2008). |
|
|
|
10.10
|
|
Securityholders Registration Rights Agreement dated as of July 19, 2007, between Doral Financial
Corporation and Doral Holding Delaware, LLC (Incorporated herein by reference to exhibit number 10.1 to
the Current Report on Form 8-K filed with the Commission on July 20, 2007). |
|
|
|
10.11
|
|
Advisory Services Agreements, dated as of July 19, 2007, between Doral Financial Corporation and Bear
Stearns Merchant Manager III, L.P. (Incorporated herein by reference to exhibit number 10.2 to the Current
Report on Form 8-K filed with the Commission on July 20, 2007). |
|
|
|
10.12
|
|
Doral Financial 2008 Stock Incentive Plan (Incorporated herein by reference to Annex A to the Definitive
Proxy Statement for the Doral Financial 2008 Annual Stockholders Meeting filed with the Commission on
April 11, 2008). |
|
|
|
10.13
|
|
Employment Agreement, dated as of March 24, 2009, between Doral Financial and Robert E. Wahlman.
(Incorporated herein by reference to exhibit number 99.2 to Doral Financials Current Report on Form 8-K
filed with the Commission on March 26, 2009). |
|
|
|
10.14
|
|
Summary of Doral Financials 2007 Key Incentive Plan (Incorporated herein by reference to Exhibit 10.15 to
Amendment No. 1 to Doral Financials Registration Statement of Form S-4 filed with the Commission on
September 29, 2009). |
|
|
|
10.15
|
|
Cooperation Agreement dated as of April 19, 2010 between Doral Financial Corporation, Doral Holdings
Delaware, LLC, Doral Holdings, L.P. and Doral GP, Ltd. (Incorporated herein by reference to exhibit number
10.15 to Doral Financials Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with
the Commission on May 10, 2010). |
|
|
|
10.16
|
|
Stock Purchase Agreement dated as of April 19, 2010 between Doral Financial Corporation with the
purchasers named therein. (Incorporated herein by reference to exhibit number 10.16 to Doral Financials
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the Commission on May 10,
2010). |
|
|
|
10.17
|
|
Amendment to Employment Agreement between the Company and Robert Wahlman dated June 25, 2010.
(Incorporated herein by reference to exhibit number 10.3 to Doral Financials Current Report on Form 8-K
filed with the Commission on June 25, 2010). |
|
|
|
10.18
|
|
Form of Restricted Stock Award Granted to Certain Named Executive Officers of the Company on June 25,
2010. (Incorporated herein by reference to exhibit number 10.1 to Doral Financials Current Report on Form
8-K filed with the Commission on June 25, 2010). |
|
|
|
10.19
|
|
Form of Retention Bonus Letter Regarding Retention Bonuses Granted to Certain Named Executive Officers of
the Company on June 25, 2010. (Incorporated herein by reference to exhibit number 10.2 to Doral
Financials Current Report on Form 8-K filed with the Commission on June 25, 2010). |
|
|
|
10.20
|
|
Amendment No. 1 to Securityholders and Registration Rights Agreement between Doral Financial Corporation
and Doral Holdings Delaware, LLC dated as of August 5, 2010. (Incorporated herein by reference to Exhibit
10.1 to Doral Financials Current Report on Form 8-K filed with the Commission on August 10, 2010). |
|
|
|
10.21
|
|
Form of Restricted Stock Award Agreement for Directors of Doral Financial Corporation under the 2008 Stock
Incentive Plan. (Incorporated herein by reference to exhibit number 10.1 to Doral Financials Current
Report on Form 8-K filed with the Commission on January 24, 2011). |
|
|
|
10.22
|
|
Amendment to Employment Agreement between the Company and Robert E. Wahlman dated August 10, 2011. |
|
|
|
12.1
|
|
Computation of Ratio of Earnings to Fixed Charges. |
126
|
|
|
Exhibit |
|
|
Number |
|
Description |
12.2
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. |
|
|
|
31.1
|
|
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of
2002. |
|
|
|
32.2
|
|
CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of
2002. |
127
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
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|
|
|
|
DORAL FINANCIAL CORPORATION
(Registrant) |
|
|
|
|
|
|
|
Date:
August 16, 2011
|
|
/s/ Glen R. Wakeman
Glen R. Wakeman
|
|
|
|
|
Chief Executive Officer and President |
|
|
|
|
|
|
|
Date:
August 16, 2011
|
|
/s/ Robert E. Wahlman
Robert E. Wahlman
|
|
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
128